In the first four decades of my life, China was little more than an enchanted country that knew about the manufacture of black powder and porcelain earlier than anyone else.

Later my gaze was shaped by Mao Zedong, his “Red Bible”, the Long March, the Kuomintang, noble communist ideals and their pathetic implementation, famine, population explosion, economic backwardness, et cetera.

During this time, China was of next to no importance to us Europeans.

That has changed.

China has become a self-confident world power: economically, militarily and politically.

Nothing works for us without China.

We have been experiencing this since Corona at the latest: In the beginning it was masks, today it is semiconductors or magnesium.

Last but not least, the pandemic could have led to the assessment, not only in China, that an autocratic system can cope with the challenges of our time far better and faster than a democracy as we understand it.

From niche market to financial market scene

The Chinese stock market has also experienced a dynamic ascent that is comparable to that of the country itself: from the neglected, low-capitalized niche market in the nineties to a highly capitalized, global stock exchange that is simply indispensable in the international financial market scene.

For me, the face of the Chinese stock exchange is the Shanghai Composite Index. What stands out: Although China has been on the verge of a real real estate crisis for months, Shanghai Comp. not much to see. What was more popular was a seemingly motivation-free back and forth within the limits between 3400 and 3700 points. But this is exactly where the charm of this chart lies: it had ample opportunity to break down, but was always able to avoid it. However, the strength of the optimists was not enough to let the index break out above 3700 points. What initially looks like a permanent stalemate between bulls and bears gets a completely different note if you apply a very valuable rule of technical analysis: As a rule, sideways phases confirm an overlapping upward trend.

What are the causes of the steady trend?

The analytical background is relatively simple: firstly, nothing is more constant than a trend, secondly, the greater dynamic that has been pointing upwards since 2019 usually points the way, and thirdly, the previously created “overboughtness” is reduced in such consolidations: the Investors are getting used to the new, higher price level.

This assessment is advantageously confirmed by the displayed MACD (Moving Average Convergence Divergence).

This standard technical analysis indicator does nothing but judge the difference between two moving averages, a short one with 12 periods and a longer one with 26 periods.

If the dynamics flatten out in the upward trend, the more agile short average falls behind the longer, more sluggish ones and thus generates a "falling" signal.

If the momentum increases, the short-term rises above the longer-term moving average, and this creates a new "rising" signal, as here at Shanghai Comp.

More crisis-proof than the DAX

The current constitution of the MACD signals that the “overbought” situation has been successfully reduced and that new momentum is emerging. It's good. In my opinion, the Shanghai Composite will therefore soon overcome the barrier at 3700 points and then continue its rise. For the approximate determination of the target, the distance between the high and the low of the currently still intact consolidation can be plotted on the breakout point. For the Shanghai Comp. this results in a target of around 4000 points. Just to be on the safe side and explicitly contrary to expectations: a relapse below 3400 points will probably turn this confident prognosis into its opposite.

Looking at one of my contributions in the past few weeks: Could it really be that the DAX doesn't look good, but the Chinese index does?

That is already conceivable.

The best example: The Shanghai Index shows absolutely nothing of a corona crash in the beginning of spring 2020 and losses like the DAX of 40 percent.

By the way, I am glad that our Christmas trees come from European forests: interrupted supply chains are practically no problem.

The idea that a sister ship of the Ever Given with our Nordmann fir on board is stuck in the Suez Canal and will not dock in Hamburg until 2022 does not necessarily make me happy.

The author heads Staud Research GmbH in Bad Homburg.

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