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China’s Stock May Face a More Downslide as the Stock Breaks a Two-Decade Trend

The Chinese stock market is on the edge of getting blown out.

China’s Shanghai Composite has fallen down to four-year lows in last two days, whereas the BATS stocks — Baidu, Alibaba, Tencent, and Sina — suffered heavy losses earlier this month.

That huge amount of selling has inflicted heavy technical damage on the Shanghai Composite, says one of the market technicians.

Craig Johnson, a chief market technician at Piper Jaffray, says that there has been a very long-term uptrend that’s been going on since 1996, and the current price action on the Shanghai Composite is now going against this trend. He added that from a technical perspective, the next support that would come into the picture on the Shanghai Composite would be about 2,000. That is around 20% below the current scenario, which means there is still a significant downside left to go.

As of Thursday’s close, Shanghai was pushed into the bear market with 30 percent below its 52-week high. Another 20 percent drop would pull it down 44 percent from the year’s highs. Even though China’s GDP report on Friday was lower than expected Shanghai’s market rose 2.58%.

Johnson believes that Shanghai will continue to come down and will ultimately affect U.S equities.

Stacey Gilbert, a market strategist at Susquehanna, pointed out that China has a huge and growing e-commerce. As is evident after Alibaba posted 60 percent sales growth in its most recent March-ended fiscal year. The e-commerce company has reported double-digit revenue increases for every year since it debuted in the U.S. market in 2014.

Gilbert says an in-the-money call to the company shares would provide a proper exposure and limit the downside risk. Although elevated volatility has made Alibaba shares more expensive, Gilbert says it is not as elevated as ETFs that contain the stock.

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