SSEC Shanghai Index Daily Chart

There is lots of attention at the Chinese stock market crash over the last month and a reader wanted Keystone to take a look at China. The SSEC drops from 5200 to 3420 (the 200-day MA); -32%. A dramatic recovery occurs overnight with the SSEC gaining +6% to 3710 (green dot). The overbot conditions, red rising wedge and negative divergence (red lines) created the top and spank down from mid-June (red arrow).

The green falling wedge pattern is in play as well as oversold conditions (bullish). The histogram and stochastics want an immediate bounce, which occurs overnight, however, the RSI and MACD line continue to slope lower, weak and bleak, so additional lows in price would be anticipated after price prints a relief rally. The pink boxes verify the strong upside trend in April and May but that strong parabolic trend higher ended in early May telling you about one month ahead of time that you do no want to be chasing Chinese stocks. The pink box in the right margin now shows that the downward move is a strong trend lower.

The central bankers are powerful, however, and have kept global stocks afloat for the last six years. Many market participants are already expecting the PBOC to fire a money bazooka a la former Fed Chairman Bernanke in March 2009, the BOJ in 2012-2013 and ECB President Draghi earlier this year. China is loading up the money bazooka with yuan as this is typed.

The weekly chart indicators remain weak and bleak so any short term bounce should give way to more downside unless the PBOC fires a money bazooka. A sharp countertrend rally may occur in the near term up to 3800-4200. The Chinese market is a mess with authorities freezing one-half of the stocks from trading. Chinese hair dressers, taxi cab drivers and doorman invested their life savings in stocks this year on margin (as the Beijing government told them to do) and have now lost a fortune. In addition, the non-free Chinese markets have frozen stocks so the people cannot even pull their money to take the losses. The roller coaster ride should continue at the Shanghai Casino. This information is for educational and entertainment purposes only. Do not invest based on anything you read or view here. Consult your financial advisor before making any investment decision.