MARKET RAP The calm before the storm?
By R M Cutler
MONTREAL - The most significant story on the Asian equity markets this week was
the Chinese government’s decision to lower the stamp tax on stock transactions
from 0.3% to 0.1% from April 24. The move was designed to shift the
psychological mood of a market that had declined over 50% in six months, and it
succeeded, as the Shanghai Composite Index responded with a 9.3% jump on
Thursday.
Indeed it is less widely remarked that in just over 48 hours - from late
Tuesday to the close on Thursday - the index moved up no less than 20% from
3,000 to 3,600. As mentioned here last week, the 2,900-3,000 technical level is
a crucial one, for the next
support after it is almost fully half as low again, in the 1,600-1,700 range.
The authorities clearly felt an "attitude adjustment" was necessary, and they
have succeeded at least in the short run. The action on Friday by mid-afternoon
in China consisted of nondescript gyrations in the Shanghai index between 3,500
and 3,600.
For the record, there is a significant technical resistance awaiting the index
at the 4,250 level if it gets that far; but a healthy market needs slow and
steady advances punctuated by periodic consolidations, rather than gaps-up that
provide no protection on the way back down.
Cross-listings with the Hong Kong market more and more link it to Shanghai, and
the Hang Seng Index followed Shanghai's pattern for the week but with much
reduced amplitude swings, moving up 6.2% from last Friday’s close to this
Friday’s open, although inching down steadily through the day so far.
However, the Hong Kong’s overall technical pattern is rather unlike Shanghai’s.
Currently at about 25,250, the Hang Seng is in the middle of a gap-down from
January 16-17 and has to decide which way to turn: there is support at 25,000
and resistance at 25,800.
The Japanese market is also at a crossroads. The stronger dollar this week
helped exporters to lift the Nikkei 225 to a two-month high above 13,800 by
Friday midday. However, it cannot stay long at the 13,500-14,000 level, because
the chart shows that this is either a continuing resistance from the downside
if the index falls below, or a support to the upside if it succeeds in
penetrating.
The technical significance of this level for the Japanese market dates from
late 1998 and was reinforced in early 2006. Yet even if the Nikkei makes it
through, it is not out of the woods. Recall that this stock index spent most of
the 1990s in a trading range between roughly 15,000 and 20,000.
Other markets each followed their own patterns, finishing up 2% at most with
the exception of Taiwan, which was down about that much. Among these, it is
important to remark that India’s BSE Sensex 30 continues on the upswing after
finally pushing back through the 15,800-16,000 range and has begun Friday with
a move toward 17,000.
The chart suggests that Mumbai has consolidated its irrational overexuberance
from last autumn and winter and is ready for a significant move higher if the
international financial environment is propitious. It seems likely, however,
that further, longer-term consolidation will be necessary before the index is
prepared to move through its all-time high near 21,000, established in the
first half of January.
The Nifty, however, had a nondescript week. It has held up above its important
4,600 support this month, but it needs to confirm its breakout from a
descending trendline tracing its early January and March peaks: as the Sensex
in fact did during the week just ended. Then we will know that the Indian
markets have at least broken upwards into a trading range and that the danger
of further declines is diminished at least for the time being.
As mentioned above, with the exception of Taiwan, the other major Asian equity
markets are closing between unchanged and up 2% on the week. Indeed, with the
exception of Shanghai and Hong Kong, overall volatility was sharply lower, and
there was hardly an exchange that moved outside a 2-3% range all week.
The only major Asian equity index that bears further significant comment this
week is Australia’s, where the All Ordinaries ended the week on Thursday by
closing just above the 5,650 level. (Australia and New Zealand were closed
Friday for Anzac memorial day.) The Australian index looks poised to advance if
it can confirm its break upwards through a fan of three downtrends traceable
from its mid-December high through the February, March, and April peaks.
The other Australian benchmark, however, the S&P/ASX 200, which in its
construction is closer to the BSE Sensex 30 (while the Australian All
Ordinaries, like India’s Nifty, is more broadly based), shares not the BSE
Sensex but the Nifty pattern, in that it still has to confirm breakout from a
downtrend traceable from its December high.
So with the exception of Chinese markets, the week just ended was much calmer
than what we have become used to. With the US Federal Reserve meeting early
next week, the rest of the month is likely to be more lively than this week’s
calm, which may herald a coming storm.
R M Cutleris a Canadian international affairs analyst.
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