If this level breaks on the Shanghai Composite, all hell could break loose

Getty/Denis Doyle

Is the chart of the recent price action of the Shanghai Composite Index the most important chart in markets?

That is the question traders all over Asia will be asking themselves as the combination of weaker economic data and President Xi increasingly upping the corruption ante – now specifically targeting finance companies – has knocked the Shanghai Composite off its highs at 3,402 with a close last night at 3,129.That’s a fall of 8%.

The rally in the lead up to the opening of the pipe that linked markets in Hong Kong and Shanghai and which accompanied a massive spike in speculative activity drove prices sharply higher: 49% from October 24th to the high at 3400 in early January.

Since then the market has cycled through two more aborted attempts to break higher and is now – at yesterday’s close – just 34 points above the low of the month.

Traders usually respect levels unless (or until) they break so there is no guarantee the Shanghai Comp falls through this level. But if it does, then technicians will turn bearish and the market could come under heavy selling.

Whether that has any impact on developed markets, focussed on ECB QE, is difficult to fathom. But a big pullback in Shanghai stocks, if it occurs, will raise questions about Chinese growth and that’s not a good sign for global markets.

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