Saturday, February 19, 2011

Shanghai on the Edge

There is still talk that China will invest, and thus solve the debt problems of other countries.  Demand from China is often listed as a reason why oil, metals, and other commodity prices will rise.  Yet it is clear from this chart that the Shanghai Composite has declined steeply from the 2007 top.  Frankly, there are false hopes currently that China will lead the global economy out of recession in the near term, and this represents evidence of a bubble in investor perceptions.

The too-fast boom in China was similar to the boom in the United States in the 1920's.  The "Roaring 20's" led to the "Great Depression".  These are the growing pains governed by the cycles that China now faces. 

Another reason to pay attention to the Shanghai is that the index bottomed in mid-November 2008 (3 1/2 months before the March 6th, 2009 bottom in the S&P 500).  The last major top in the Shanghai was November 11, 2010.  So we are coming up on a 3 1/2 month difference again, and that may be a leading indicator of a top in the S&P 500 (as it was in 2008).

My cycle analysis shows that the consolidation period is nearly over for the Shanghai Composite.  The cycle predicts a sharp decline to follow.    

3-day Chart

Weekly Chart showing how the index has been struggling at the mid-line of the pitchforks:

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