Tuesday, October 20, 2009

China Shanghai Index Leads, DOW Follows!

Daryl Guppy wrote a very interesting article published on the CNBC website today.

Key extracts from the article:

“We use the Dow Index and the Australian ASX S&P 200 index (XJO) as representative of markets outside the US. The DOW and XJO charts have been time shifted to the left so the absolute market lows of March 2009, match the time of the absolute market low in the Shanghai Index in October 2008. This type of time shifted display clearly shows which market is a leader and which markets are followers.”

China leads and the DOW follows:

1. The DOW is now at 10,000 but how important is this in terms of global market behaviour?

2. The DOW is following the behavioural leadership of the China market.

3. The 10,000 equivalent for the Shanghai Index is 3,000. The Shanghai market reached this level and briefly powered above it before developing a trend correction.

4. The Shanghai Index remains in trend correction mode and is using price and time corrections. The price trend correction is the sudden index fall of between 15% to 20% from 3480 to 2750. The time correction for the trend is the extended sideways movement over the past 10 weeks.

5. The important relationship is not the comparative percentage returns, but the comparative behaviour. We need to watch carefully because there is a high probability our markets and the US market will follow this China market leadership behaviour with a lag of several months.

6. This suggests a trend price correction in the order of 10% to 15% followed by a period of sideways trading as the market applies a further trend correction using time.

7. Analysing and understanding China market behaviour is absolutely critical to any market strategy. China leads, the DOW follows the behaviour and other markets tag along further behind. Watching China gives investors a glimpse of the potential future. It is absolutely essential to developing any long term portfolio investment or planning.

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