Today, the Shanghai Composite received a massive blow and closed lower by 2% on the day, after recovering from a 2.79% slide. The Shanghai Composite had recovered over the last few months and was up by 14.54% from its summer lows, on the world economy recovering, and the US and China working on their trade differences. However, like the Chinese city Wuhan, and now Huanggang, which is also about to be quarantined, fear took over and send the index lower.
The index had carved out a large inverse head and shoulders pattern that triggered on December 31 and had a target of 3336, however, the price is now back in the pattern, and the bullish bias is clearly gone.
Looking beyond the near-term panic in the market, the overall trend is bullish above the November low of 2856, and if the Shanghai Composite manages to remain above the low then we might see the index revisiting its January 15 high of 3126.
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One of the biggest losers with the biggest volume was Besttone Holding Co, it closed 10% lower with 27.51 million shares traded. Besttone provides member points redemption systems, video, and game application, but also offers travel booking and hotel managed, which could explain why it is the biggest loser. On the other side of the spectrum, Jiangsu Wuzhong Industrial Co., Ltd, is the biggest winner, being up by 10%, and having 104.82 million shares traded. Jiangsu Wuzhong Industrial Co. is a large Chinese pharmaceutical company.
“Martin Lam, ATFX’s Hong Kong-based, Chief Analyst of Asia Pacific, said: Chinese stocks could trend downwards for the next few months and bottom out in March or April. Driving stocks lower should be the second stage of US and China trade negotiations, the US tariff remaining in place, a slowing world economy, and the Wuhan flu. However, come March and April, and the earnings results show that companies have remained resilient, then traders could bullish on stocks once again.”
For now, the softness in the Shanghai composite has had a limited impact on the Dow Jones, but there is a positive correlation between the two indices, as seen on the chart below, where the black line is the Shanghai composite, and the red line is the Dow Jones index.
For how the SARS epidemic affected the stock markets read: Revisiting SARS and How the New Coronavirus Outbreak Can Affect Financial Markets
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