Shanghai Composite Suffers Deep Decline: Can Chinese Stocks Recover?

The Shanghai Composite Index has been a huge winner in 2015. But when the masses jump on the mo-mo train they often forget that it’s a two-sided market. And when the “sell” button gets hit… sometimes it comes with swift moves to the downside.

Case in point: last week.  Although investors saw similar pullbacks on the stock exchange in January/February and April/May, neither were as swift as the recent decline. The Shanghai Composite (SSEC) dropped 13.3 percent last week and, according to fellow contributor Chris Kimble, that’s the 8th worst decline in its history.

Here’s a graphic from Chris’ post last Friday:

shanghai composite worst weekly declines in history chart

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One reason Chris cited for the drop was the Rate-Of-Change (ROC) Index on a 52 week basis showed the market was up over 130 percent. Wow, that feels a bit bubbly. In a related note, the iShares China ETF (FXI) experienced a similar bubbly burst earlier this year and has since corrected as well.

Thus far, the decline in Chinese stocks has been contained. The S&P 500 closed today within 10 points of all-time highs. And although Europe has declined, that started well before China’s market woes.

The coming weeks will be important for the Shanghai Composite as investors try to digest the stealth 5 day loss.

Today saw Chinese stocks dip lower at the outset before reversing to close higher. This produced a “hammer” candlestick that may benefit short-term traders if the stock exchange sees follow through tomorrow. As well, the index closed right at its 50 day moving average.

Either way, the deep decline from last week will likely take time to heal. The Relative Strength Index (RSI) made lower highs prior to the dip (divergence) and has now dropped all the way down in the 40’s.

Shanghai Stock Exchange Composite Index (SSEC) Chart

shanghai composite stock exchange decline chart june 2015

Thanks for reading.


Twitter: @andrewnyquist

The author does not have a position in any of the mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.