SSEC Shanghai Index (China) Monthly Chart; PBOC Defending the 200-Month MA

Chinese stocks have been slapped silly over the last year the tight standard deviation bands (purple arrows) squeezing out a strong move lower. Price hugs the lower band on the way down. The middle band at 3039 and dropping is on the table going forward.

Price is using the pink 200-month MA at 2507 as support. No doubt the PBOC (China's central bank) is supporting the SSEC to try and hold the line at the 200. The communists will burn through reserves to support the stock market. As always, the central bankers are the market.

The SSEC weekly chart is set up with positive divergence providing the boost over the last couple weeks. The upside has legs on the weekly basis, however, the MACD line on the monthly chart above remains weak and bleak. The RSI has also not reached oversold levels. Thus, Chinese stocks will rally a few weeks due to the positive divergence on the weekly chart but then roll back over to the downside to retest the lows on the monthly basis. The PBOC will be pumping like madman to hold that support at 2500. The 100-month MA at 2767 is an upside target for this weekly rally and should be achieved, say this month.

The blue line shows the 3K level that the PBOC was fixed on maintaining since the crash in 2015 and early 2016. The communists managed to maintain the charade in 2016, 2017 and into 2018 but that is where the wheels fell off. The upper band was violated a year ago so the middle band was on the table, which was achieved, and then the lower band was on the table and that is what price is hugging on the way down currently.

China is in between a rock and a hard place. The PBOC can pump like all the other central bankers to keep the stock market elevated but this will diminish its $3 trillion in reserves (which used to be $4 trillion a few years ago). As the reserves dwindle, confidence is eroded in the yuan, and there is a capital flight out of the country. This behavior will create a financial crisis and the communist leadership has already been implementing measures the last few years to avoid this outcome. China limits any funds you can take out of the country as well as foreign ownership in companies. The Beijing communists want that money to stay inside China. Of course, at the same time, if the PBOC does not print money to support the stock market, it will continue collapsing and China faces a disaster if that occurs. President Xi retrieves a handkerchief from his suit pocket wiping beads of sweat from his forehead.

ASHR, the Chinese ETF, is bouncing from the positive divergence on its weekly chart just like the SSEC. This upside move should have legs especially when the PBOC has started the year with a triple R cut. The People's Bank of China is already greasing the skids for a stock market recovery. The triple R's are the reserve requirement ratio's, the money that banks must maintain on hand (in reserve) to remain financially stable. Lowering the triple R's allows banks to lend more money out which spurs the economy. Of course, these late-stage loans tend to be more risky and the banks will have less money on hand if an all-out financial crisis occurs.

Keystone does not hold any positions in Chinese stocks currently but will buy the pullbacks in ASHR going forward. This is a short-term trade, however, only based on the strong weekly charts. The party should only last a few weeks and then the long trade will be ditched. ASHR is at 23 already popping from the low at 22. There are resistance levels at 24, 25, 26 and price may want to go up to back test the 200-week MA at 26.54, say, by month-end.

If the PBOC can print money and hold the line at the 200-month MA this year, the communists have a chance to keep their heads above water. If the 200-month MA fails, all is lost and if China is in collapse the rest of the world will surely follow. 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.