Shanghai Index Rebounds, But Here’s Why It Won’t Hold

Summary:
• The Shanghai Index inched up on Thursday, but the skepticism surrounding China's economy has just been compounded. Here's what that means.

China’s Shangai Composite Index (SHA: 000001) bounced back on Thursday, gaining 0.1 percent to rise to 2,788 points. Nonetheless, the Index will find it difficult to register an upturn, with an underlying bearish momentum having kept it down by 3.1 percent in the last month and 6.2 percent year-to-date.

The momentum has seen it dip below the 20,50 and 200 Exponential Moving Average (EMA) levels on the daily chart. In addition, the 50-EMA crossed below the 200-EMA in mid-June, underlining bearish market conditions.

The Shanghai Composite Index daily chart with 20,50 and 200 EMA indicators

The Index is under renewed pressure after five of China’s top six banks reported declines in profit, signaling that most of the economic pillars are still shaken despite the government’s stimulus. The banking sector has been outperforming the rest of the equities markets, thanks to a government-backed lending program aimed at encouraging real estate property purchases.

China’s economy has slowed down significantly in 2024, with some analysts warning that the official 5 percent growth target may not be achieved. In addition, four investment banks, Bank of America, City, UBS, and TD Securities, have added their voice to this view in the last two weeks. Meanwhile, the Caixin Services PMI reading for August released on Tuesday came in at 51.6, missing the forecast figure of 51.9. This will likely keep the Shanghai Composite Index subdued in the near-term.

Near-term Shanghai Index chart

The momentum indicators on the Shanghai Index suggest a potential recovery by the bulls, much as the sellers are in control. The Index has rebounded from the lower Bollinger Band, with the MACD attempting an upward crossover of the signal line.

On the 30-minute chart, the Index signals control by the bears below 2791. That will likely establish the first support at 2781, but extended bearish control could breach that level and test 2770.

Alternatively, moving above 2791 will signal bullish momentum. In that case, the first resistance will likely be at 2800. However, if the upward momentum strengthens, it could break above that barrier, invalidating the downside narrative and potentially sending the Shanghai Index to test 2807.