This week’s data deluge already came in, courtesy of the Chinese official data for inflation, showing that it is accelerating modestly to 2% on expectations of 2.1%, below the 4% target. The granular data is slightly less rosy, but it is likely a fairly good data point still.
All eyes are still likely to be on the Federal Reserve, most likely going with dirty scalpels to cut away at economic risks as they decide to undertake Operation Twist without the sterilization of selling shorter term debt to fund longer-term purchases. As I mused earlier, a back-of-the-envelope calculation shows that going over the Fiscal Cliff means we need ever more stimulus. Just to stay afloat.
To gain a slightly better understanding of what China might do in the coming weeks, I will revisit and update an old favourite chart of mine, the China A50 weekly. We start with a static view of the Chinese index. Charts, as always, courtesy of CMC markets.
China A50 Statics:
As we can see, there is quite a bit of reliance on any levels possible as we have been going down. Another reflection is that the support lines have quickly turned into resistance when broken, and the second rejections off the triangle bottom seem to do the trick for approaching the top. Still, this triangle is now at least 40 months old and should crack soon either way. Not too much new under the sun here that wasn’t discussed in the post linked earlier, except we took a fall rather than a policy rally. Given P/E’s near 11, I suspect that it is highly likely to get some momentum should more accommodating policy come into place, although I speculated on that last time as well. The fibs have been holding very very nicely, but keep the level of the lowest resistance fib in mind, because it is fairly important later in the dynamic analysis.
China A50 Dynamics:
This is a daily view of the last 9 months, although the most relevant are the last 3-4. We see the bounces up against the fib level discussed earlier shown in the boxes, and the white boxes are somewhat similar in candle structure (exhaustion candle down, corrective move up, explosive move up, corrective move down ) to the first four days of last week, although we finished by a different follow-up on Friday. In the previous cases this was followed by two weeks of selling off the open, but we had a new high off a strong buying pressure within the trading hours this time, making the Thursday candle look like a hook! The ADX/DMI tells me that tomorrow’s market reaction to the data will be imperative: if the DMI+ can break the ADX level that has recently started showing a bullish short-term move for the first time since May, and the last time we entered a bullish short-term period for this index was a year ago!
The Bollinger Bands support this story, showing expansion into a bullish move, possibly indicating a shift of trend (MACD has yet to catch up, so the recommendation is to sell into the divergence top if you have to trade it) and the upper bollinger band resting around 7 500. Thus right around the fib! We also have a firm close above the 63 EMA, which in turn remained above the 63SMA and should be seeing strong support soon from the 21 EMA. My estimation is a 2-3 day run into the fib (+2.3%) before a slow consolidation of a few days from a technical standpoint. The FOMC meeting might throw a wrench in this either way, and I would expect the Fiscal Cliff discussions to make a stronger impression on the markets.