Friday, November 12, 2010

Shanghai Composite Plunges: Was it the Interest Rates?!

Just google, and you will find a few dozen reasons trying to explain why Chinese stocks plunged over 5% today. The question: Did these websites or analysts help investors GET OUT in time? Nope.

Ok, fine. So did they help investors GET IN, in time for the rally? Here's another 'expert' analyst view in June 2010, with SSEC trading around 2430:

Subsequently SSEC has gone as high as 3180, a 30% gain! So much for expert opinions.

So who knew about the Rally?

Folks who read up a bit of Elliott Wave Theory & basic Technical Analysis, knew with some degree of probability, that a five wave move in one direction is generally followed by a 3 wave move in the opposite direction (most of the time). This was the basis of the bullish call a few months ago on this blog.

And how about the PLUNGE today?

The extent of the decline (a whopping 5%) was not possible to envision, but we sure were setup for a fall. Although i couldn't publish this chart in time, here's three technical observations about the setup (see chart below):

1. Historical Resistance at 3180
2. Overbought with a clear negative divergence on the Daily chart.
3. Overbought on the Weekly chart.(not shown)

And the catalyst (Interest Rate Hike) magically appears at this juncture! For the fundamental folks, this was a classic example of how technicals can help time your investment decisions better.

So what's next?

This move down looks like the back-test of the breakout above the downtrendline. Crucial historical support is also nearby around 2900. If we stay above the line, we may go sideways here for a bit before any attempts higher. I may buy SSEC around the 2900 level, with a Stop at 2850. An unlikely break down here below 2850, changes the picture, and has support at 2700. Watch the volumes on this pullback for clues.

The medium-term target of the previous high of around 3480, still stands for now.

Hang Seng Index - very short term

On a side note, HSI has corrected as well, and seems to be developing a positive divergence on the hourly, indicating potential for a handsome rebound sometime next week.

All the best!
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