Stock Commodity and Financial Markets Chart Analysis

By: Mike_Paulenoff

The Chinese market, as represented by the Shanghai Composite has a very vulnerable aspect to it and needs to do some serious work on the upside to take off and extend its bull move.

Looking at the Shanghai, one sees the low in October 2008 to the high in August 2009, followed by a sideways consolidation. We can look at this as a digestion period of its huge upmove, which becomes a bullish/pennant type pattern. However, after a 6-month sideways stint, one would expect a breakout, but instead it continues to coil.

The Shanghai Composite needs to take off again in order for it to extend the bull market. Otherwise, if it breaks down and takes out the 200-day at 2993, and then retests the trendline at 2925, it could end up having a very severe downtrend in China. That would belie the positive message coming out of China this past week that monetary policies will remain accommodative and fiscal policy will remain stimulative.

Or it would confirm that the reason the Chinese authorities are so accommodative and so stimulative is because the Chinese economy is not nearly as strong as everyone thinks it is or would like to believe it is.

Comparing the Shanghai to the S&P 500, you see that the SPX was consolidating Tuesday, Wednesday and Thursday, and then popped on Friday after the news about the U.S. employment numbers. The Shanghai shows that China was struggling even before the employment news came out. The Shanghai chart patterns looks heavy, vulnerable, while the SPX took off and looks like it's headed right back to retest the January highs around 1150.

The S&P 500 chart suggests that money is coming into the SPX and is either stagnant in the Shanghai or actually coming out of the China index. This shows me that perhaps if the global economy is expanding, it is doing so because the U.S. economy, and not the Chinese, will lead the way out, even though China is perceived to be the buyer of everything -- natural resources, gold, grain, etc.

Can the S&P 500 continue higher with the Shanghai going down? My suspension is no, but I have a feeling we're going to find out in the next few days. The S&P 500 is probably going to test the 1150 level, and if it breaks out and stays at that level and consolidates, it's going to take off. My suspicion is that the Shanghai will then make headway in testing its key resistance at 3250.

That's the bullish scenario. If the S&P 500 fails at around the 1150 level it could have a series of down moves right off the double top.

So what does all this mean to other markets? Let's take a look at the Market Vectors Steel Index ETF (SLX), which rocketed last week. The stocks that made it explode are United States Steel Corp. (X), foreign holding AK Steel (AKS), Steel Dynamics (STLD), and Cliffs Natural Resources (CLF), the most bullish of the group.

Looking at this SLX you see steel is taking off, and would immediately think it's a function of China. But in order for that to be true, the Shanghai has to make some headway to the upside. My suspicion is that the SLX started an intermediate-term correction in January and ended the first leg of it in February, and now we're having a move that's retesting the high levels and then it's going to fall apart again. That, to me, will be a more accurate indication of not only China's influence on the natural resource areas but also that the US economy is not as strong as the S&P 500 chart would lead us to believe.

The Market Vectors Coal ETF (KOL), another natural resource ETF, had a huge week and it, too, looks similar to the SLX. It could be in an intermediate-term correction, with a corrective leg down in January to February, a strong intermittent rally in February and March, and then a downmove in March-April. This week, if everything takes off, the KOL will probably peak around 39-40 and then reverse.

However, if it keeps going with the S&P 500 that will be very bullish in general for natural resources and the natural resource names and I would expect to see the Shanghai up-ticking to reflect the US economy improving and the natural resource demand improving or reigniting from China.

Looking at other resource ETFs, the Oil Service HLDRs (OIH) looks relatively toppy in general and nowhere near as dynamic as steel and coal. The Energy Select Sector SPDR (XLE) is also lagging. The Ultra Oil & Gas ProShares (DIG) is lagging but has broken out a bit to the upside on all of its moving averages, the 200-day exponential on Friday and closed above it for the first time.

The oil component of global demand seems to be the laggard, which bothers me, so I have to look at the driver of natural resource demand, the Shanghai Composite, as being somewhat suspect here. I also have to look at the money being attracted into the steel and coal sectors as being more of a momentum play than a reflection of resurgence in the US economy. I'm watching all of these components more closely because I need more clues; I need to know that the S&P 500 isn't breaking out merely because some of the natural resources and the financials are showing some signs of life for a change. Because without China it would seem to me that it can't extend that far.

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By Mike Paulenoff

Mike Paulenoff is author of MPTrader.com (www.mptrader.com), a real-time diary of his technical analysis and trading alerts on ETFs covering metals, energy, equity indices, currencies, Treasuries, and specific industries and international regions.

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