Chinese equities as represented by the Shanghai Composite are in free-fall to begin the new year:
Shanghai Composite (Weekly)
4-month bear flag resolving to the downside as relative strength index stalled out near the median line during the recent bounce (characteristic of bear flags)
Meanwhile, the People’s Bank of China (PBOC) is actively intervening in the foreign exchange market to support the yuan which has been under pressure for months. However, such intervention is unlikely to prevent a much larger decline in Chinese equities over the coming weeks.
The simplest (more often than not simpler is better in market analysis) analysis points to a blow-off top from a parabolic rally which took place last summer. The four month long stair-step bounce which took place between August and December of last year has come to an end – with this week’s breakdown to begin the new year the simplest interpretation points to a bearish flag which has resolved lower.
The PBOC can intervene all it wants in markets and the end result is likely to be the same; the Shanghai Composite is on its way down the 200-week moving average just above the 2600 level.