Daryl Guppy
Warnings come too late
By Daryl Guppy (China Daily)
Updated: 2010-06-17 10:50
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American and European market analysts are sounding warnings about the potential for a double-dip market development. These warnings are already too late as markets have developed the first stages of the retreat below consolidation areas. Market behavior again leads the conclusions of some economists.
Investors are interested in the potential limits of any market dip. Is this a return to the March 2009 lows in the Dow or just a smaller retreat? The potential answers lie outside the analysis of Western markets.
China leads world market development. China was the first major economy to begin reducing stimulus packages implemented during the global financial crisis. China leads the way in evaluating the potential impact of this process. In particular, the Shanghai Index leads the world in the behavior of financial markets. The Shanghai market is further advanced along the potential development of a double dip.
Starting in November 2008 China developed a rapid recovery pattern with a sharp rebound from the lows. Subsequently this was shown to be the pivot point low of the 2008 downtrend. The similar pattern of trend reversal behavior did not develop in US and Western markets until March 2009.
In late 2009, the Shanghai Composite Index peaked and then developed a consolidation or sideways pattern. This eventually developed into an equilateral triangle pattern. This is a pattern that shows market indecision and it also reflected market consolidation prior to the development of a new trend.
The specific pattern of consolidation development is different to the consolidation pattern seen in Western markets. These markets established a broad trading range pattern defined by historical support and resistance levels. The temporary breakout in April was followed by a substantial retreat and retest of the lower levels of the consolidation area.
The broad pattern of behavior - a rapid long rally recovery in the first part of 2009 followed by consolidation - was initiated by the Shanghai market. Western markets followed this pattern of behavior with a lag of 10 or 20 weeks. The Shanghai market behavior did not cause the Dow behavior, but the observation of the broad correlated behavioral relationship provides a useful way to develop strategic analysis.
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There is a high probability that the decline below the trading band consolidation areas in the Dow and other markets will also be followed by a rapid decline similar to that experienced in the Shanghai Index. This is a retreat of between 15 and 20 percent.
Analysis of the head and shoulder and consolidation pattern in the FTSE index gives a downside target of 4500. This is a 20 percent retreat from the 2009 FTSE high. A downside projection of the Dow consolidation pattern has a target near 9200. This is a 17 percent retreat from the May 2010 peak.
If the Shanghai market is successful in developing support near 2480 then it suggests that the double dip in Western markets will also not reach the March 2009 lows. This Shanghai index behavior confirms the higher probability of a Western market retreat to the shoulder area of the inverted head and shoulder pattern that developed in the 2009 downtrend trend breakout.
The failure of a Shanghai index support rebound near 2480 opens the way to a full scale double dip with a retest of the 2008 market lows. This advance behavioral warning from the Shanghai index gives traders and investors invaluable information when it comes to managing the current Western market weakness.
The general strategic environment and linking of market behavior suggest it is a good time to take profits in long positions in Western markets. It's also a good time to buy into the China market as rebound signals are confirmed. Many Western investors use ETF exposure to implement this type of global strategy.
The author is a well-known international financial technical analysis expert.