China stock market

Shanghai Composite tiptoes along dividing line between bull and bear markets

Benchmark stock index has been edging sideways around the 200-day moving average for the past month

PUBLISHED : Wednesday, 21 March, 2018, 2:18pm
UPDATED : Wednesday, 21 March, 2018, 3:33pm

China’s Shanghai Composite Index has been flirting for the past month with the reading that distinguishes between bull and bear markets.

The benchmark gauge of mainland-traded stocks has been stuck within its 200-day moving average, briefly rising above or falling below the gateway four times since February.

The moving average is seen by some traders as the key technical indicator pointing to the long-term trend on stocks. Rising above it means a bull market, and below it bears take the helm.

“The 200-day moving average is important because it’s a reflection of the medium- and long-term trend on the market,” said Wei Wei, a trader with Huaxi Securities in Shanghai.

“If we are firmly above it, that’ll boost market confidence and attract more buying interest.”

The 200-day moving average has proved to be an effective indicator in foreshadowing market direction, if history is any guide.

When the Shanghai Composite last broke through the level in June, it rose as much as 13 per cent in the following seven months. While during the 2015 market rout, the index fell by another 28 per cent within five months of breaching the average price over the past 200 days.

The rangebound pattern is likely to continue for a while, according to Huaxi’s Wei, as traders are reluctant to act while they balance the sustainability of the nation’s better-than-estimated economic data and global uncertainties that continue to hold back stocks gains.

“The consolidation [still] isn’t long enough for the market to make a breakout,” she said.

“Uncertainty like financial deleveraging and interest rate increases in the US need to be gradually digested.”

The Shanghai Composite has been seesawing after it recouped part of the losses sparked by the global turbulence following a surge in US Treasury yields. It dropped 0.3 per cent to 3,280.95 at the close on Wednesday, 1 per cent shy of where the gauge’s 200-day moving average currently stood.

Xun Yugen, a Shanghai-based strategist at Haitong Securities, suggests the market may move out of the fluctuating pattern as early as next month, however, as the release of more economic data offers further clues on the strength of the Chinese economy, and as policymakers’ drive to boost equity financing boosts allocations of stocks.