Yeah, forced title aside, here is my next personal major investment thesis, presented in a few charts. Please don’t invest based on reading this, but dig further if you find something of any value here. Lets first put down the premises:
A) The Chinese stock markets, specifically the Shanghai Composite, is a key indicator of economic activity in China, and led strongly by the industrial giants and housing from its previously high weighting on construction, housing, and manufacturing.
B) This results in an extreme correlation between the Shanghai Composite / China A50 indices and the global commodity prices excluding oil (other drivers) and precious metals (as much currency as commodity). Take some time to acquaint yourselves with the common industrial metals if need be, especially nickel, aluminium and copper.
C) Comments out of the CCP and Xi Jinping’s history would indicate that he is the man to push for new urbanization and free-market reforms. Largely, this would then see large appreciations for construction (of both housing and infrastructure) in terms of the outlook.
D) Greater China in general is having stock market reflation and a lot of momentum with it at the moment, and it looks like liquidity will keep being ample worldwide. Momentum, simply, is with the Chinese indices, and it looks like the ever greater liquidity should at one point or another also be reflected in commodities if the world indeed starts seeing any sort of real growth in the coming few years.
Given this, what is the technical playground looking like? Well, for starters, look into the analysis of the China A50 I did a while back to get up to speed – it contains a lot of the important background information and more nitty-gritty fib-level outlooks, among other things and it is generally something that will be needed to enjoy the following analysis at its best.
Given that information, please have a look at a more updated version of the same chart, courtesy of CMC Markets:
Items worth special attention:
- We have a Bollinger band blowout on the weeklies. This, given the way the market is rallying, is good and highly bullish.
- Looking at the retracement it did a month ago, we can see that it comes in below the 61.8% fib, indicating a great hook. This is repeated currently, right below the 50% (false) fib, and replicates the “hooky” way in which the market rallied to form the move that generated the fib to begin with. We now have serial hooks at similar levels, indicating similar rebalancing efforts by traders as the market moves upwards.
- We have a very “wicky” last week candle with overweight on the bottom wick, which is a good indication of a sustained movement.
- MACD and ADX/DMI giving the all-clear. Nothing to be worried about here for a few weeks!
- Annual EMA/SMA positive divergence maintained, after having flirted with the possibility of crossing over. This is really good, as the divergence started early in 2Q2012, but since persisted given the slow, bleed-out fall and consecutive new lows. The rejection near the bottom should give bulls the ammunition they need to push the market higher for considerable time.
- This is all supported by a rocketeer wannabe of a quarterly EMA!
You now have the fundamental outlook, and the technical hindsight, also backed up by bits of previous history. Lets look at the likely effects coming back from the propositions we made above:
The move that started this wedge began more than 2½ years ago and the price has been contained within those lines for almost 1½ years. There is also a great “target span” $40 above current price, and both ADX/DMI and MACD are giving either positive signals or indicating that they are highly sensitive to any moves. The tightness of the Bollinger bands also makes this contract ripe for any more aggressive move to get legs as soon as hedging contracts are taken out and hedges need to be rolled. Given the MA clustering slightly below and then the bottom trend line, there is a lot of support for the price coming into these levels, especially given that a shorter-term, more aggressive trend line /channel has been supporting price for the last 3-4 months.
On the resistance side, there is a large number of less significant ones clustered around the $380-$400 levels that the top line has been bouncing around. however, I do expect the resistance-clearing momentum from clearing any one of them to generate enough inertia to overcome the next resistance level, and so on.
If anyone is wondering where the winds are blowing towards, check out what nickel (major component of stainless steel in terms of price) has been doing as of late.
The convexity is stacked in favour of this trade, and it could really get legs if industrial activity in Japan gets some speed to it!