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Shanghai Composite Plunges By 8.75% on Coronavirus Shutdown, What Lies Ahead?

Today, after being closed for the celebration of the Chinese New Year on January 23, the Shanghai Composite started trading 8.75% lower than its January 23 close.

The move lower the Shanghai index motivated was by the quarantine of millions of people across China as the number of confirmed Coronavirus cases in China has risen from 629 to 17200 from January 23 to February 2, which is a growth rate of 27.34 times.

The growth rate of confirmed Coronavirus cases in China from February 1 to 2, is approximately 20.2%, which is lower than the typical reading near 35%, but still high.

If the growth rate of 20.2% is maintained over the next 14 days, there will be 228,150 confirmed cases of the Coronavirus in China. The possible sharp rise in confirmed cases might prompt more isolation in and of China, causing private consumption to slide and people waiting to go back to work until it is safe to do so.

People’s Bank of China Tries to Support the Market

The Chinese central bank has committed itself to inject 1.2 trillion Chinese Yuan, which in today’s value is 174 billion USD, using reverse report rate operations on Monday, to try to limit market volatility. However, the Shanghai composite is just up by 1% from its lows and is still down by 7.69%, from its January 23 closing price, despite the central bank’s actions.

Read our Best Trading Ideas for 2020.

Shanghai Composite Technical Analysis Outlook

This morning, the Shanghai composite slid below its August 2019 low of 2733.48, and a daily close below this level could open the door for further slides in the weeks ahead. The potential support levels for the index below the August low are the January 21, 2019 high at 2620.98, followed by the January 29, 2019, low of 2559.87.

However, I think investors will be careful with short-selling the composite at current levels as the index is short-term oversold, the risk-reward ratio if unfavorable, and the Chinese central bank is trying to stabilize the markets.

If the Shanghai composite manages to stay above today’s low and looks to close above the August 2019 low there is a chance that we might see a bounce in the index as bargain hunters step in.

If the Shanghai composite indeed manages to close above the August low of 2733, traders might lift the index to the November 2019 low of 2857. However, if the index manages to bounce weakly and the slides below today’s low in tomorrow’s session, then the plunge might resume.

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