A new check on China & USA stock markets

The battle between the American and Chinese stock markets continues. The relative strength comparison index between these two markets, has historically shown an alternation with more or less short term trends. Since the end of 2018, we had a predominance of the Chinese market, but alternated in the short term, by moments of weakness and signs of renewed strength. In this sense, we had, in the period indicated, three signals of strength of the Chinese market compared to the American one and, probably, since April 16, a fourth signal is being generated. After the opening of the Chinese New Year, marked by the Spring Festival that saw a closure for holidays in the period between 11 and 17 February, the Eastern stock market suffered a drastic drop.

But there are signs of recovery, which we can see in the chart below. In the top box we have the MSCI International CHINA A On Shore index, in the middle box the U.S. S&P 500 index, and in the bottom box, the relative strength index between the two markets. When the relative strength index reverses upward, the Chinese market is stronger. We can see, that in the first box of the chart (representing the Chinese index), the price in the last period has been supported several times on the 200-day moving average (red line in the period indicated by point 1), then breaking upwards the 50-day moving average (green line), which has remained above the longer moving average and has also sloped positively.  But the most interesting signal is given by the relative strength indicator, which has been positively inclined towards the Chinese market since the end of 2018, and in the short term is reversing for the fourth time in favor of the latter: in the lower box the four reversals of the indicator are highlighted by a blue letter next to the reversal (a, b, c, d). We can see that in the case of the last reversal (d), the indicator would still have to travel half way from its reversal point, to reach the upper resistance which is located at the end of the bracket indicated with point 2. But it is also around a resistance level that could be a barrier in the first attempts.

I display in the following table the performance data in terms of spread (difference in performance) between the Chinese stock market (orange line) and the U.S. stock market (blue line), starting from the reversal dates of the four points (a, b, c, d), for the following three months.

In the weekly chart of the MSCI International CHINA A On Shore Index below, we can see that the MACD oscillator is reversing, and last week's candle closed above the CNY 5,600 (USD 870) level which has now become a support element for the potential new uptrend. A complete reversal of the MACD and the crossing of its zero line, would give further confirmation to the developing trend.

In conclusion, the signs of a renewed prevalence of the Chinese market still need some additional confirmation in the medium term. It is likely that such a fast reversal may need a period of consolidation. That said, the charts are still showing us a renewed opportunity in the Chinese market compared to the American one.

About the author

Mario Valentino Guffanti is a board member and Head of the Lugano Chapter. He is a financial advisor, technical analyst and researcher based in Milan, Italy. As an author of technical articles and lecturer as well as instructor in technical analysis courses in Switzerland, he is also dedicated to financial coaching through NLP techniques (neuro-linguistic programming).