Sept. 2 (Bloomberg) -- The FTSE/Xinhua China 25 Index, made up of the largest 25 Chinese companies based on market size, fell below the 50-day moving average for a second day, the first back-to-back drop since global equities tumbled in February.

“China has led on the way up and now it’s broken a popular moving average,” said Ryan Detrick, senior technical analyst at Schaeffer’s Investment Research in Cincinnati. “Without question, it’s a big concern.”

The FTSE/Xinhua gauge slid below the key technical levels after the benchmark Shanghai Composite Index sank 6.7 percent and entered a bear market on Aug. 31. The iShares FTSE/Xinhua China 25 Index Fund, an exchange-traded fund, declined 2.3 percent yesterday in New York, the most since Aug. 17.

Chinese stocks have foreshadowed moves in global equities the past two years. The Shanghai Composite peaked on Oct. 16, 2007, two weeks before the MSCI All-Country World Index. The Shanghai index fell 72 percent from its 2007 high and bottomed out on Nov. 4, 2008, four months before the MSCI gauge.

“China seems to be in valuation correction,” Detrick said in a phone interview. “Unfortunately, this could continue.”

Chinese stocks may drop further as trading volumes weaken, driving the relative strength index for a benchmark gauge lower even after it signaled a rebound, Nomura Holdings Inc. said.

The relative strength index for the CSI 300 Index, measuring exchanges in Shanghai and Shenzhen, touched 29.42 on Aug. 31, only the second breach this year of the 30-level seen by some as a signal to buy. It may sink as low as 20, Nomura analysts Kenneth Chan and Tacky Cheng wrote in a report. The RSI is a moving average based on how rapidly prices gain or retreat.

In technical analysis, investors and analysts study charts of trading patterns and prices to forecast price changes in a security, commodity, currency or index.

To contact the reporter on this story: Allen Wan in New York at awan3@bloomberg.net

Last Updated: September 1, 2009 18:51 EDT