Shanghai Index Breaks Triangle, Leading Other Markets Lower

 

Sometimes it Works

When we recently discussed the sudden drop in the demand for luxury consumer goods in China (see “Sign of the Bear” for details), we offered inter alia a chart of the Shanghai Composite (this one) with the words:

 

“The Shanghai Composite Index – a triangle has now formed in the index in the wake of unprecedented government intervention. Unfortunately, triangles are usually trend continuation formations”

 

It seems that unfortunately, they really are:

 

1-SSECThe Shanghai Composite breaks below the lower boundary of the triangle we discussed. Often this tends to be double-plus-ungood – click to enlarge.

 

 

In the meantime the US and European stock markets are having a string of bad hair days as well, which bears out another contention of ours, namely this one:

 

“Due to China’s closed capital account, what happens in its stock market rarely has an effect elsewhere. However, if this bubble should actually implode, it may well once again turn out to be a leading indicator – it wouldn’t be the first time that China’s market was the last one to rally and the first one to plummet back to earth.”

 

The daily chart of the SPX looks bad enough, and has actually gone from “non-committal” to “bad” in just two trading days – surprising a lot of people, we would wager:

 

2-SPXThe S&P 500 falls out of its trading range – click to enlarge.

 

The broad-based NYA looks even worse though – it has started falling with a series of downside gaps, and that certainly looks rather ominous:

 

3-NYAThe NYA has moved down very swiftly, with two downside gaps in a row – click to enlarge.

 

Conclusion

It is always difficult to tell whether a support break will persist, but the fact that the Shanghai Index has just now indeed broken below the lower boundary of the triangle it has recently formed should be of concern to stock market bulls.

Our guess is that the 3400 level will be decisive though – this is the lateral support level that has stopped the first leg of the decline and happens to coincide with the twin peaks made in January. This is something one should watch closely in coming days and weeks, as it could once again give an early hint as to what to expect elsewhere.

 

Charts by: BigCharts, StockCharts

 

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