China Stock Market: A Long Downtrend Ahead

Looking at FTSE China A50 60-min chart, we can see that the index has failed to surpass the medium-term downtrend line, RR at 10000 mark. The index broke below the short-term uptrend line, SS at 9800. The trend-following indicators, MACD & ADX are bearish.


Chart 1: FTSE China A50's 60-min chart as at Sept 7, 2015 (Source: uk.investing.com)

Looking at the more popular SSEC index monthly chart, we can see the index trading below 10-mth SMA line & 20-mth EMA line. MACD has just crossed below the MACD Signal Line (a bearish sign) while Stochastic will soon enter the oversold zone (where it may stay for a while if the market is in a bearish).

In the past 2 occasions when all these 3 events were present (that's when index traded below 20-mth EMA line, monthly MACD flashed the negative crossover and stochastic entered the oversold zone), the market trended lower for the next 5 years.

The main difference between these 2 bear markets is that the 2009-2014 market was preceded by a sharp rebound in 2009. This sharp rally in 2009 was a relief rally after the sharp fall in 2008. Given the current market decline is fairly similar to the 2008 selldown, SSEC may put in a sharp relief rally. This rally is unlikely to happen in the next few months. My guess is that if it ever happens, it may be in 1st quarter 2016.


Chart 2: SSEC's monthly chart as at Sept 7, 2015 (Source: Yahoo Finance)