Wednesday, August 25, 2010

Tale of Two Markets (China & U.S.)


Forex Special

We're keeping an eye on Chinese ADRs, like Shanda Interactive (SNDA) and Trina Solar (TSL), in view of the strong relative showing of the Shanghai Composite Index compared to the Cash S&P 500 (SPX). I have a thesis that the global equity markets are in a leadership transition from "West to East," or from the U.S. to China (reflective of the "real world," no doubt). Political, economic, financial transitions along the magnitude we are talking about are never completed without turbulence and chaos before the dust settles, after which a "new order" emerges.
Chinese companies are in a position to prosper during and after the transition. Perhaps the enclosed chart picture is reflective of the progressing divergence of the two equity markets, which is making the Shanghai Composite considerably more attractive from a technical perspective than the SPX. As the chart shows, it's a tale of two markets. On the one hand, we have the Shanghai Composite, which hit a significant reversal low on July 2 at 2320 and climbed sharply to its August 19 high at 2702 (+16.5%). Since the high, the SH Comp has pulled back to today's intraday low at 2615 (-3.2%), prior to turning up and closing higher today at 2650.31, which positions the benchmark China index just 2% beneath its August high and 14.2% above the July low. Let's also notice that today's action reversed off of the rising 20 & 50 day exponential moving averages, which is a very positive technical sign.
On the other hand, the cash SPX exhibits a considerably weaker technical picture in the aftermath of its 11.7% July-August upleg. With the cash index at the equivalent of 1060 at pre-open today (and much lower since), it is 6% beneath its August high, and has violated and sustained beneath both its trading moving averages and its July-August trendline (1067). At 1060, the SPX is poised to test its prior significant pivot low at 1056.88 from July 20, which if violated could trigger a downside press directly towards the July low at 1010.91. Only a sharp upside reversal and rally that propels the index above 1072 will establish initial signals that the SPX has put in a significant near-term low.
Mid Day Minute

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