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Green Shoots In China?

 May 01, 2012 02:38 PM

(By Cam Hui) In the past few weeks, the markets have shown concern that China may be on the verge of a hard landing. My reading of the charts indicate that those concerns are starting to recede and there may be signs of "green shoots" out of China. Bear in mind the following two caveats to my analysis:
  • "Green shoots" are fragile and can easily be trampled underfoot; and
  • "Green shoots" are indications of stabilization, not signs that a roaring bull market is about to begin.
First, a chart of the Shanghai Composite shows that the index has rallied through an intermediate term downtrend (solid line) and that market is in the process of a sideways consolidation. In fact, it could be argued that the Shanghai Composite is starting to form a wedge pattern (dotted lines). Depending on which way the pattern resolves itself, it could point to the future trajectory of Chinese growth.

China is an enormous consumer of commodities. In this post (see Time to take some risk off the table), I pointed to the dismal behavior of commodity sensitive currencies as a sign for caution. Now, commodity sensitive currencies such as the Australian Dollar has rallied through its downtrend. A period of sideways consolidation is likely at this point.

The Canadian Dollar, which is another commodity sensitive currency whose economy has greater leveraged to the American economy than the Australian economy, recently staged an upside breakout from a trading range.

Commodity prices are also showing a tender green shoot, though that one is far more fragile.

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