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Indicators, fundamentals point to more upside for China A50

IN September 2018, the SGX FTSE China A50 Index Futures (A50) had retraced approximately 30 per cent from its peak in January 2018. However, prices are currently recovering and testing its three-month high, following an inverse hammer pattern which occurred on Sept 12, 2018. Looking ahead, based on three indicators, we believe the upward trend is likely to continue.

Exponential Moving Average (EMA)

The EMA is commonly used to gauge the general trend, as it helps to filter noise from random price fluctuations by putting greater emphasis on prices that are more recent. Investors usually use this indicator to determine support and resistance levels.

An initial sign that the trend for the A50 index futures has turned bullish will be the 20 EMA crossing the 40 EMA. This bullish crossover, which occurred on Sept 25, 2018, signifies that buying strength is present and that prices could be pushed higher.

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Despite failing to break the 200 EMA on its first attempt on Oct 3, we are of the view that this retracement is only temporary and the 40 EMA is still providing a strong support. As long as the 40 EMA support holds, we expect prices to recover and retest the 200 EMA.

Trend lines

A trend line is a sloping line in which price either has trouble rising above, or sinking below. A breakout of the trend line will indicate a reversal of trend.

Last month, prices broke above the downtrend line, reversing its bearish trend. Hence, with the trend currently bullish, we are of the view that prices will continue to see more buying momentum.

Relative Strength Index (RSI)

RSI can be used to determine overbought and oversold conditions in the market. A reading above 80 represents that the asset is overbought while a reading below 20 represents that it is oversold. The RSI for the A50 futures is currently at the mid-way mark of 48.57, which is still quite a distance away from the 80 mark, therefore indicating that there is more upside potential.

From a fundamental perspective, several market developments underpin an A50 recovery. MSCI is considering lifting the China stock weightage for the MSCI Emerging Market Index to 2.8 per cent and FTSE Russell, another leading global index provider, has also stated that it will include mainland Chinese shares in its major benchmarks from June 2019. These moves would give Chinese equities greater global exposure. In addition, with China set to cut the average tariff rates on imports from the majority of its trading partners, it is expected to cushion the blow from the tariffs set by the US as its trade war with the US deepens.

Looking ahead, a double bottom pattern is forming, with the neckline at 11,954, the 200 EMA level. Should prices break above this level, its target price will be 13,421 (a 12.3 per cent upside). This is in line with the 75.4 per cent Fibonacci retracement level drawn from the 15,000 high in June 2015 to the 8,310 low in August 2015. The double bottom pattern rebounding from the 38.2 per cent levels of the Fibonacci retracement, with prices being at the one-year low, further supports the probability of this pattern successfully crystallising.

  • The writer is investment analyst, Phillip Futures

Disclaimer: Chartpoint is provided by Phillip Securities Research for information only, and should not be construed as investment advice.