With the selloff in Chinese shares showing no signs of stopping, one analyst is predicting that the battered stock market may be headed for another major leg down to 2,500 points very soon.
In early trade on Monday (Jan 18), the Shanghai Composite index was last seen flat at 2,903.33 points, after swinging between gains and losses at the market open.
Last Friday, the key index fell more than 3 per cent to close at its lowest level since December, and officially entering bear market territory. Two days prior to that, the Shanghai Composite fell below the key psychological level of 3,000 points.
The last time the index went below that key support level was in August 2015, when a summer market rout wiped out US$5 trillion of value. Following that, mainland authorities stepped up efforts to stem selling and revive investor confidence by unleashing an unprecedented slew of supportive measures.
However, renewed volatility since the start of 2016 has wiped out the gains from the government-led recovery. Analysts attributed the markets’ dismal start to persistent investor concerns over the health of the world’s second-biggest economy, turbulence in the Chinese yuan as well as a perceived botched effort by Chinese authorities to manage the stock market via a “circuit breaker” mechanism.
The circuit breakers, which came into effect on Jan 4, was scrapped four days after implementation, and market watchers have criticized the newly-minted system for amplifying panic among investors.
“Bad policies such as the scrapped circuit breakers really damaged people’s confidence in the government’s ability to handle the capital markets,” Angus Nicholson, market analyst at spread betting firm IG, said in a telephone interview. “Economic data also show that the economy clearly hasn't recovered just yet and that has amped up risk selling.”
A SINKING FEELING
According to Mr Nicholson, the key level to watch for the Shanghai Composite will be the 2,850 mark, which was the lowest level set during the market dive last August.
Breaching that mark will mean that Chinese stocks are likely to be on track to sink down to 2,500 points. With the ongoing extreme levels of volatility, “that could come as soon as this week,” the Melbourne-based analyst said in a telephone interview.
From a technical perspective, the outlook is even bleaker. According to independent technical analyst Daryl Guppy, the Shanghai Composite could be in for a bigger plunge to 2,400 points before finding support.
"From Nov to Dec 2014, the index moved quickly upwards between 2,400 and 3,000. The rally did not have any consolidation pauses,” the Australia-based analyst said. “This means that when the market falls below 3,000, there are no historical consolidation or support areas until the index reaches 2,400.”
“If the index is unable to rally above 3,000 then we will see more investors joining the selling. Currently most of the selling comes from short-term traders and they are in panic mode,” Mr Guppy said via email.
To be sure, there are analysts who are less bearish.
Christoffer Moltke-Leth, director of global sales trading at Saxo Capital Markets, said Chinese equities could stabilize in the coming months following the recent steep correction.
There's a lot of weakness to be found in the construction and heavy industries, and that gives further downside risk to China. But we’ve seen a heavy correction already so we could see the market stabilizing in the coming months,” Mr Moltke-Leth said.