Chinese markets have been on a rough ride lately: from the crackdown on big techs and the meltdown of the debt market due to Huarong’s insolvency to annihilating the private tutoring sector, washing out tens of billions of dollars from Chinese equities.
Although China is one of the first countries to show strong recovery signs from the Covid-19 pandemic, the economy is losing steam due to the Delta variant. Most of the Middle Kingdom’s economic indicators show contraction, confirming what the Chinese markets have been pricing in.
Is it all that gloomy for investors? How about Charlie Munger loading up on Alibaba (BABA) right when China government got its hands on tech companies?
China A50 is getting ripen for trying out
The recent economic data from China didn’t encourage investors – Industrial Production (YoY) (Jul) posted 6.4%, down from 8.4% the previous month, and forecasted 7.8%. The Caixin Manufacturing PMI also showed signs of a slowdown, falling to 50.3 in July from 51.3 in June.
Although, analysts expect Manufacturing PMI (Aug) to grow to 50.8 vs. 50.4 previously. Keep an eye on the data release on August 31st; the better-than-expected result may lift up Chinese equities.
Despite the wrecked manufacturing sector, consumers are getting more positive, with the Consumer Confidence index growing to 122.8 vs. 121.8 in the previous month.
If you’re one of those expecting to profit from Chinese assets’ change in price, you want to look into the price charts.
Below is the monthly China A50 chart. Look carefully at the price area where the market currently is.
The prices are sitting on the mega resistance-turned-support, 15000. Also, the 0.618 Fibonacci retracement level is almost at the current prices. These details are good hints to base the long position upon.
You may consider waiting for a price action signal on the lower timeframes. Alternatively, you may aim to buy the breakout of 16000, which is also a significant price, being the 0.5 Fibonacci retracement level.
If China’s fundamentals turn out to have even a more adverse impact on stocks, China A50 may fall even deeper, targeting the long-term trendline (see grey inclined line). You must be prepared for this scenario too. If you don’t want to short the index, at least avoid buying the full intended size but leave some cash for possible entries at the trendline.
Let’s move down to the weekly chart to see the price action in detail.
If you see any day in the upcoming weeks closing below 14500, the market is in bigger trouble. Short-term traders may short the index with protective stops above 15000, while long-term investors should expect to be ready to buy around 13000.
A good price action buy signal would be piercing down the long-term trendline but closing the week reliably above it. Also, Japanese candlestick patterns such as engulfing or piercing lines would be appropriate entry triggers around near the trendline. Investors can buy with the stop below the week’s low.
Of course, it’s uncomfortable to buy when the sentiment is so negative. However, that’s the very reason why Chinese equities might be severely undervalued now. The sentiment or even the economic data don’t necessarily represent what should happen in the markets. What we can do is calculate the risks and look for the right trigger to enter the market.
A look under the hood – Ping An Insurance
While you’re considering what to do with China A50, look at one of its components that has the heaviest weighting in the index – Ping An Insurance. Due to the recent floods in Henan, China, the company received an immense number of insurance claims, totaling around US$2 billion. The payments put pressure on the company’s stock, dragging China A50 down as well.
The weekly chart above may be revealing the further underlying weakness of the market. The stock broke 56.0 support, retested it from below for three weeks, and closed near the local lows, suggesting the decline’s continuation.
Despite the awful sentiment around the Chinese market, the technical picture presents opportunities to catch the bullish reversal. Better-than-expected economic data may serve as a trigger to start the bullish recovery.