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China Stocks Break 200-Day Average: Technical Analysis

Chinese stocks are showing “signs of life” after the Shanghai Composite Index exceeded its average level from the past 200 days for the first time in almost a year, according to Bespoke Investment Group.

The Shanghai Composite reached 2,438.44 yesterday, topping the 200-day moving average of 2,435.49 for the first time in 229 trading days. This marked the index’s third-longest streak below the moving average since 1990, Bespoke wrote in a report yesterday. The prolonged period below the level “clearly illustrates how weak China’s market has been over the past year,” Bespoke said.

The benchmark gauge has gained 11 percent in 2012, after falling a combined 33 percent in the previous two years, on speculation the central bank will ease monetary policy to boost economic growth. The Shanghai index last broke above its 200-day moving average on January 27, 2011.

“In general it’s a good sign to see it happen,” Justin Walters, Bespoke’s co-founder, said in a telephone interview. “After being down in the doldrums and underperforming the rest of the world for so long, there are finally signs of life coming out of China.”

Premier Wen Jiabao is trying to cut reliance on exports and increase domestic consumption. He said on March 5 that policy makers reduced their growth target to 7.5 percent from the 8 percent goal in place since 2005. Growth in China, the world’s biggest user of copper and second-biggest consumer of oil, helps drive earnings growth for commodity producers.

No Distinct Trend

There was no distinct directional trend in the prior periods immediately after the Shanghai Composite climbed above the 200-day threshold following a prolonged slump below, Walters said.

Following the 213-day streak that ended in June 2002 and the 307-day streak ending in September 2005, the index fell 5.2 and 8.2 percent, respectively, over the next three months. The benchmark surged 26 percent in that same period following a 278-day streak ending in March 2009, Bespoke data show.

Market conditions and investor sentiment ultimately will determine how the index responds to rising above the 200-day moving average, according to Walter.

“Investors in general will treat the event more as a positive than a negative, at least based on the technicals,” he said. “As long as the U.S. and China can continue to do relatively well, things should hold up.”

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