The Shanghai index has bounced back in the past two weeks as investors price in more government stimulus as the Chinese economy crumbles. The index dropped by more than 1.20% on Friday but is still trading close to its highest point since July 27. This recovery has been in line with the performance of other global indices like the Nikkei 225 and Dow Jones.
China faces major challenges
The Shanghai index has been in a recovery mode in the past few weeks even as China faces significant challenges. One of the most important challenges that the country is facing is the Yangtze River. According to media reports, the river, like the others in Europe, has seen its lowest water levels on record.
This is a major issue since it is one of the most important waterways for transportation in the country. It is also a major source of hydropower in China. As a result, the country is now battling to find alternative energy sources. At the same time, many companies have announced that they have shut down their plants to save energy.
This crisis adds to the ongoing Covid-19 crisis in the country. The number of cases has continued rising in the past few days while the government has maintained its Covid-zero strategy. As a result, data published this week showed that the country’s industrial production and retail sales rose at a slower pace than expected.
The Shanghai index has therefore jumped as investors wait for more stimulus from the government. The central bank has already slashed interest rates on two bonds. It has also risen because of the significantly weaker Chinese yuan. The USD/CNY price has jumped by more than 7% in the past few weeks.
Shanghai index forecast
The daily chart shows that the Shanghai index has been in a strong comeback in the past few days. Along the way, the index has risen close to the 50% Fibonacci Retracement level. It rose above the 25-day and 50-day moving averages. The index has also formed what looks like an inverted head and shoulders pattern.
Therefore, the index will likely continue rising as bulls target the next key resistance level at 3,350. A drop below the support at 3,260 will invalidate the bullish view.