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Equity markets rally after Shanghai bottoms

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by Lance Lai

In our first report back in 2013, we have surveyed the Globe and have chosen Shanghai’s index because it appears the first signs of the long awaited bottom is with us, and most equity markets have also rallied hard since the bottom was seen in Shanghai on 5 December 2012.

A low was looked for at 1,962, first mentioned in my report of 29 October 2012 and then on “Switzer” on Sky News Business Channel on 29 November 2012.

On 5 December 2012 we got what is most likely the bottom of 1,949. Only 13 points lower or half a percent lower than sought. That same day, Shanghai closed at 1,975 or 13 points above, so the level of 1,962 was right in the middle of these trading ranges.

Typical of markets though, when you are at a bottom, it does not just go up a little, it goes up by arguably too much.

Shanghai has done just that, having gone up 18.8 per cent since 5 December, i.e. in 6 weeks.

It appears that world markets and Shanghai are in need of a pull back.

A pull back in the order of 5.4 per cent to 2,190 should be a minimum. A pull back to 2,134 or 7.9 per cent would be ideal.

For most of last year, we were vigilantly watching this index on the expectation that this is how the globe will muddle through the impact of the GFC. This month is the first time in almost 18 months we are able to weigh seven positive aspects in the chart against 2 negative aspects. This is a very positive turn around.

If you haven’t already bought into this global rally, including Australian Equities, a better time ought to present in coming weeks.

This “bottoming formation” has implications for Equities in for the next 12 months of 2013. The muddle through seems to be working, and if we see this market continue to stabilise by not falling much below abovementioned “pull back levels”, we can rest easier that the worst should be behind us.

Positives

200-day moving average has flattened out

A bounce was looked for in my show of 29 November, when it was at 1,975, for it to bounce at 1,962. On 4 December, five days later, the index bottomed at 1,949, about half a percent lower than my sought for level.

Ideal pull back level of 2,134 or 7.9 per cent lower.

Crossed the 200-day moving average on a strong move up on 25 December 2012.

Crossed the major level of 2,134 on a strong move up on 14 December 2012.

The bottom that the chart was trying to form over the past four months appears to be constructive.

This is the second time the 200-day moving average has been crossed by price from below since it was crossed for the last time from above in
late May 2011.

Negatives

The index is now up 19% from these lows. This is too much indicating a pull back is now needed.

A first level to pull back to is 2,190 or 5.4 per cent lower, then 2,134 or 7.9 per cent lower.

Published on: Friday, January 25, 2013

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