Shanghai Composite Index - 11 September 2024
You will come across specific terms in these notes (FLD, VTL, and so on). Rather than explain them each time, you will find definitions here: guidance notes for Hurst cycles terminology.
Approaching 80 day cycle trough zone, expecting a recovery.
Even if you do not trade China, understanding market sentiment there is key to a host of other macro elements. A rally in China has an impact on global growth, which in turn affects copper, oil, the metals complex in general as well as the FX carry trade.
Price has devalued significantly since the May top and now sits 2 standard errors below the regression mean (not shown above), which is snap back territory. It is also a tempting spot, above the February low for there to be a meaningful market intervention by the government. Additionally, we had a weekly real down gap so far this week over last week. Statistically (since 1990) this happens once every 107 weeks on average and post gap performance over 1 week, 4 weeks and 10 weeks averages -2.6%, +7% and +22.5% respectively.
There is a solid cycles argument to made for the early February low being at the minimum an 18 month cycle trough. This level should therefore limit downside risk. A serious breach to the downside effectively means China gets incinerated and this view is a lower probability outcome. On this basis alone we are skewed towards a mean reversion trade to the upside. An 80 day cycle trough is due imminently and the FLD cascade above should draw price up into it. An upside breach of the 10 day FLD will be the trigger, so stay alert.
