One huge error that most investors tend to make is to get influenced by a combination of past trends and ongoing mainstream sentiment. As an opinion or expectation about a market becomes mainstream, it usually implies that the trend is over, and that a new trend in the opposite direction is in the making.
The most recent textbook example of this is crude oil. Mainstream media started to write about expectations of crude oil falling below $20 /barrel, right at the time when oil was putting in a long term bottom. It is dangerous to listen to mainstream ideas which are widely accepted.
Today’s textbook example is China, and its stock market in particular. Currently, the mainstream idea is that China is a bubble ready to burst, and that China’s stock market will continue its collapse (as seen in 2015). The Washington Post published China’s debt bubble is getting only more dangerous very recently, and that is just one of many articles with a similar tone of voice. Another examples is an article which appeared on Bloomberg last week One Year After Bubble Burst, China’s Stock Market Has Gone Quiet, and which has also a negative tone.
Meantime, the key question according to us: “what is price doing”? Price is the only real barometer of the investment community. Price includes all decisions made by all market participants, whether manipulated or not. Price in the short term looks ready to break out. We obviously refer to the stock market price of the Shanghai Stock Exchange.
China’s stock market looks ready for a big breakout, at least on its daily chart. That is not really in line with the doomsday articles which have become mainstream, as mentioned above.
Note that China’s stock market looks great on the short term (daily chart) but not bullish yet on the longer term chart. The weekly chart, see below, representing the long term trend, does not reflect a bullish pattern yet. The Shanghai Stock Index is trading in a descending channel though it still respected its uptrend which started in the summer of 2014. We cannot make any statement about the long term trend of the Chinese stock market at this point; we can only indicate that 2750 points represents secular support and 3200 long term resistance.
CONCLUSION: Investors should not fall in the trap of simply accepting mainstream ideas, nor should they anticipate the future based on recent trends. Short term, the Chinese stock market looks great, and set for a low risk opportunity (by going long). Long term, however, we want to see evidence of a support or resistance break before getting too excited.
