The selection of index constituents creates a bias in our understanding of the market. This bias is tilted even further when we consider that underperforming stocks are dropped from the index every few months and outperforming stocks are added. It is called survivor bias because only “winners” are included, so the index always appears to increase over time.
Not so with the Shanghai Composite Index, which tracks every listed stock. Some would say this is a more accurate index that often looks like it is underperforming other world indices. This feeds the headlines trumpeting the poor performance of China’s market.
The Shanghai Composite Index, which we use in these notes, provides a more accurate perspective on the broader health of the Chinese economy and its ability to withstand President Trump’s tariffs.
Buried in this index are stocks that offer consistently profitable trading opportunities in a market that can only be traded from the long side. This is a market that is particularly compatible with chart and technical analysis and that is the way we should approach analysis and trading in this market. Each week, guppytraders.com compiles a report identifying trading opportunities we anticipate will develop over the next five days.
See also: China fund beats 97% of peers by buying Pop Mart, dumping Moutai
Here are four examples of the recent weekly performance hidden in the broad index. Xiangtan Electrochemical Scientific (002125) delivered a 68% return and 39% for Zhejiang Jianye Chemical (603948). Xinyaqiang Silicon Chemistry (603155) returned 38% and Cybrid Technologies (603212) finished the five-day period with a 24% return. Xinjiang Baodi Mining (601121) was a laggard with 9%.
These are not examples cherry-picked for performance. They were our five recommended stocks to watch for the week.
These returns are better than usual but not extraordinary or unusual, with 15% to 25% returns over the five-day period typical for many stocks.
See also: Is learning Chinese worth it?
As you would expect in a mature, diversified economy, the Mainland stock market has many companies in traditional sectors such as heavy industry, property and energy. However, they also list the service, high-tech and cutting-edge science industries.
The idea that equities in Mainland China are flat so far this year is incorrect. Compared to the 20% gain for Hong Kong’s Hang Seng Index, we can say the Shanghai Composite Index is less attractive with a 12% gain. However, that does not reflect the consistent range of opportunities available in the Mainland markets.
The Mainland market can be traded directly using the cross-connect programme. You need a broker that offers access to Hong Kong markets and can also access the cross-connect facility.
Technical outlook of the Shanghai market
The Shanghai Index rally has slowed but not retreated. It is too soon to get overly excited, as the two previous moves above the resistance level near 3,435 failed. What traders and investors are looking for is the ability of the 3,435 level to now act as a support level and a base for a further continuation of the uptrend.
This breakout is different from the previous tests of this level. The previous breakouts can be characterised as fast rallies. The current breakout is part of an uptrend slowly developing, which may support the trend continuation.
For more stories about where money flows, click here for Capital Section
There are three target areas for any sustained trend continuation. The first target is the value of trendline A. This was previously a support feature; now, the projected trend line acts as a resistance feature. The current value of the line is near 3,575.
The second target is near the previous high of 3,675 reached in October 2024. This was a rally peak that had no relationship with any historical resistance points. The peak represents a psychological rather than a chart-based technical barrier.
The Shanghai Index behaviour is defined by well-established trading bands. The width of these bands is projected upwards or downwards to establish future price targets. This calculation method sets the third target for the trend breakout. A trading band projection target is slightly higher than the October 2024 high and is placed at 3,700.
These projected targets are very bullish and should be treated with caution. Although the target levels may be achieved, the projection methods do not indicate how the trend will develop.
The current trend behaviour is steady and must be supported by investors slowly building new positions. This activity would be reflected in the degree of separation of the long-term group of averages in the Guppy Multiple Moving Average (GMMA) indicator.
Currently, this group has a relatively narrow separation, which suggests that investors remain cautious about the prospect of a prolonged steady uptrend.
The position of trendline B, along with the lower edge of the long-term GMMA, is the defining support feature for a continuation of the uptrend. Any index pullback needs to use these areas as support features if the longer-term uptrend is to continue.
Daryl Guppy is an international financial technical analysis expert. He has provided weekly Shanghai Index analysis for mainland Chinese media for two decades. Guppy appears regularly on CNBC Asia and is known as “The Chart Man”. He is a former national board member of the Australia China Business Council
