THE DEATH CROSS IN CHINA
The Chinese equity market continues to lag in the New Year and is still in the red while the S&P 500 has now traded 4.5% higher in less than a quarter. Growing fears of policy tightening (see here) and potential bubbles have Chinese investors paring back their risk. As the fundamentals begin to look more murky there is a potentially foreshadowing technical development occurring in the Chinese equity market – a “death cross”.
Technical analysts are awfully creative in naming their indicators and this one lives up to the hype. The rare seen “death cross” is currently unfolding in Shanghai. As you can see in the following two charts a “death cross” occurs when a short-term moving average crosses over a long-term moving average from top to bottom. It’s generally a sign of a weakening market move. Figure 2 shows the inverse of the “death cross” – the “golden cross”, which usually foreshadows a continuing or new bull market move.
Figure 1
Figure 2
The implications for China are interesting. As we’ve previously mentioned, bubbles very rarely pop and then run back to their highs. In fact, a quick study of history’s bubbles (see here) shows that it has never happened in any of the previous major bubbles. More often, the action is sideways to down for many years as the reality of the bubble bursting takes years to set-in and the massive supply/demand imbalance gets worked off. For China, the stars are beginning to align for more difficult equity days ahead. The last time the dreaded “death cross” occurred in Shanghai was just prior to a 60% crash. While we’re unlikely to be staring at the abyss again, we could very well be looking at an early warning system of things to come later this year as a potential trade war and Chinese policy tightening put a death grip on the Chinese equity markets.
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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16 Comments
what about the debtor of Goldman Sachs, who has more LT debt the Greece, Spain and Portugal combined?? 340 BN USD!!!
This is his work, Tim Geithners!! The future always shows the results of ones work
In eyeballing the chart of EWZ, Brazil seems to be setting up for one also. Hmm.
EWZ, Brazil may have looked somewhat similar around the first week in February…now the 50 day is leveling out and the daily is up.
Brazil is somewhat unique; in that it is a net exporter of commodities and is mostly energy self sufficient with large reserves of offshore oil and a sugar cane ethanol industry.
Here’s EWZ…
http://stockcharts.com/charts/gallery.html?s=ewz
The trend since early Feb. is different.
Interesting as current cross occurred at 3 lower highs like late 2007/early 2008, and unlike last cross at higher high/low in early 2009…
Also check out 50 MA’s direction and 200 MA looks like it’s about to roll over.
Always something to keep an eye on (along with simply moving above/below the 50 and 200) but with a sample size of two, in two years in that chart, it’s not especially compelling right now.
I don’t have data testing the death cross as an indicator, but its inverse, the golden cross, has proven VERY prescient. My guess is the same can be said of the death cross.
http://pragcap.com/golden-cross-or-fools-gold
Thanks; I definitely keep my eye on both the 50 and 200 and how price acts around those areas, which is pretty similar to the crosses. Dealing with the chop in those areas is difficult but all new trends always start there.
Since April of 09 the 50 DMA has been living well above the 200 DMA and is just now beginning to level off it bounce back Nov. 08 low. The chart, to me, looks like it will be experiencing sideway action for the next several quarters.
TPC — Death Cross — We saw them in the Russell 2000 and SPX in late Jan, February. They lasted all of a week. I don’t put much faith in that, at least not on the downside.
Revision — previous crosses was the 20 and 50 EMA. Not exactly the same thing, but supposed to be bad.
If you ask me, looks a lot like the chart of the DJIA up through May 28, 1930… the rest was history. Might want to take a look at that one…
What bothers me about the situation between China and the U.S. is the typical U.S. arrogance. I mean, China is basically subsidizing the U.S. government, if it wasn’t for them or Japan or Saudi Arabia there would be no U.S. government right now.
What’s worse is that Clinton, Obama, Geithner are all threatening China, even though, once again, China is saving the U.S. from total collapse. How dare they even tell the Chinese how to run monetary policy.
We’re losing our AAA credit status, which is a great thing because it’ll be a slap in the face to all of those Keynesians currently running the White House, Congress, Fed, etc.
You could be right on both charts which I had observed the same for DJIA for 5-yrs chart too. Have a feeling sharp-correction could happen between Apr – Oct this year..
http://stockcharts.com/h-sc/ui?s=fxi
How’d the ominous “death cross” treat FXI? Feels like voo-doo to me.
Maybe it will go sideways for awhile, but I’d be betting on a break to the downside rather than the up. Look at all these stories on these so called LGFV’s that are piling up Ponzi style, a bubbling real-estate market, etc.
It’s all gonna end in tears sooner or later since unbridled speculative investing (aka GREED) looks like it is gonna start to unravel. My guess sooner rather than later (this year).