Wednesday, October 20, 2010

China's Drag On The Market

I keep hearing and reading about how the market's outlook would be so much better without those darn Chinese. Yesterday you read that China sparked a sell off with their raise of interest rates. I've heard that the Chinese economy can't do well without the US consumer doing well, and we all know the US consumer of yester-year isn't coming back soon. As China goes, so goes the world, and the Shanghai has been in a sustained downtrend for over a year, being far in the red YTD. Well, take a peek at what's happening now.

William O'Neil, founder of IBD and a pretty sharp technical analyst, would look at this chart and have a cup and handle bottom reach off the screen and slap him. The handle is a little too long, but it's breaking, which would suggest that China's market is resuming a climb . China is moving to prevent bubbles. They are not stupid like our US leadership, so, yes, they are raising rates. And they are distancing themselves from not only US fiscal policy, but the US consumer as well, becoming a trading partner to the world.

Their stock market has spent most of this year below the critical 140 day ema (blue line) but has now regained the territory above it and turned its slope back to positive. China does indeed tend to be a harbinger for the rest of the world. Note that the bear decline for the Shanghai ended in October 2008. So the cup and handle breakage would predict a continued climb for global stocks. Other harbingers, like the QQQQ and the US transports are well above their April highs and point in the same direction for the broad market. China a drag on the market? Well, maybe not right now.

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