What Can Silver Tell Us About China?

The recent parabolic leveraged speculative rise and fall of the Shanghai Composite is reminiscent of silver’s epic rise and crash during 2011, have a look:

 Silver (2010-2011)

 

Silver_2011

 

 Shanghai Composite (2014-2015)

 

SSEC_11_months

While the chart structures are slightly different (silver rose 50% in barely 6 weeks while Shanghai took about 3 months to do the same), the parallels between these two markets are striking:

  • Silver rose to nearly $50/oz in April 2011 fueled largely by retail speculators chasing the euphoria of a rising market based on some false premises such as the “death of the dollar” and the even more flawed notion that the Federal Reserve’s quantitative easing programs would eventually generate hyperinflation.
  • The Shanghai Composite more than doubled in the span of less than a year fueled by retail speculators going “all-in” on a rising market and pouring an unhealthy dose of margin debt on top of their bets just for good measure

China_Margin

If this analog holds true the Shanghai Composite should find support around the 3400 level which happens to correlate with the rising 200-day simple moving average and resistance dating back to 2009. But it will also mean that the Shanghai market has left its cyclical bull phase and resumed its secular bear market which began in late-2007:

 

Shanghai_Monthly