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Global Outlook

Chinese Equities: Look Out For The Bull In The China Shop

August 14, 2014, Thursday, 21:55 GMT | 16:55 EST | 01:25 IST | 03:55 SGT
Contributed by eResearch

Three weeks ago the Shanghai Composite (SSEC) broke out from a multi-year bullish wedge formation. Wedges imply a minimum move back to the start of the wedge which, in this case, would mean an advance to over 3,000 - a 36% rally! Whoo-hoo!

A recent spike in volume, however, warns of a short-term top and the better play is to wait until a pullback has completed.

On the other hand...

The old saying about a bull in a China shop alludes to the fact that things can get broken easily. That could include those who are bullish on Chinese equities, too.

I like to think that a break-out from horizontal resistance can be used to confirm a break-out like this.

In the above chart that level is at 2,267. But the chart I am going to be watching equally closely is the relative performance chart of SSEC versus the S&P 500 (chart on the next page).

When this chart moves upward it means China is outperforming the USA, and vice versa. As the chart shows, SSEC has been under-performing the S&P for over five years. In addition to a breakout on the absolute price chart (above), I want to see relative performance break its long down-trend before getting long China.