The Shanghai Composite Index is poised to extend gains as investors anticipate the Chinese economy will keep strengthening, said Tom DeMark, the developer of market-timing indicators who predicted the gauge’s rally from a four-year low in June.
A correction this week is possible before the benchmark index of Chinese equities continues to rise to a level “much higher” than his last call of 2,323, said DeMark, whose technical analysis is designed to identify market supply-and-demand imbalances for trading opportunities. The Shanghai index had rebounded 15 percent from a low reached June 27 through Sept. 13, surging 6.6 percent in the past two weeks, the most since December. The Shanghai Index slipped 0.2 percent to 2,231.40 at the close today.
“Current price activity is characteristic of a market which is dealing with a possible broad and major overriding shift in Chinese economics and fundamentals, which could favorably affect the index and translate into an extended move upside,” DeMark, the founder of Market Studies LLC, wrote in an e-mail from Scottsdale, Arizona on Sept. 12. “This does not preclude a modest correction or sideways movement over the next week.”
The Bloomberg China-US Equity Index of the most-traded Chinese stocks in the U.S. entered a bull market this month and has surged 25 percent from a June low. Better-than-estimated data from exports to industrial output for the last two months signal a recovery in the world’s second-largest economy. Premier Li Keqiang pledged last week to accelerate financial reforms, and the cabinet approved a free-trade zone in Shanghai this month with relaxed controls on capital flows.
DeMark said the Shanghai gauge will meet some resistance between 2,313 and 2,348 before climbing higher. “The sharp acceleration over the past two weeks has introduced the possibility of a positive fundamental development which could extend the current rally into something more than one normally would expect,” he wrote.
While DeMark also correctly projected the market would slump in February and forecast an index rally in December, he had called for a rebound in a March 19 e-mail.
Chinese equities traded in New York extended a two-week rally to 7.1 percent, the most for such a period since January 2012, led by Internet companies. NQ Mobile Inc., which started a music application for mobile devices last week, rose 28 percent last week, while AutoNavi Holdings Ltd. jumped 18 percent.
DeMark’s Combo indicator completed a “13 countdown” on a daily basis for the Shanghai index. DeMark’s “countdown” study involves comparing a security’s closing price to its highest or lowest levels two periods earlier, with cycles of “exhaustion” forming when a pattern continues 13 times.
DeMark said in December that the Shanghai Composite’s decline below 1,960 signaled selling has climaxed and the index will rally 48 percent within nine months. The benchmark gauge bottomed at 1,949.46 on Dec. 4 and rallied as much as 23 percent through Feb. 6.
He said Feb. 6 that the measure would decline about 8 percent to within a range of 2,230 to 2,250 before rebounding. The index was down 8 percent from when DeMark made the call through March 18, when the gauge closed at 2,240.02.
His call for a rebound of 48 percent within the following six months on March 19 proved too optimistic. The measure tumbled 14 percent to a June low.
The iShares China Large-Cap ETF, the largest Chinese exchange-traded fund in the U.S., climbed 2.2 percent last week to $38.21 in New York, while the Standard & Poor’s 500 Index advanced 2 percent for a second weekly gain.
Companies ranging from Qihoo 360 Technology Co. to YY Inc. reached record highs last week amid optimism that the outlook for sales growth and profitability in the sector is improving, according to Andy Yeung, a New York-based analyst at Oppenheimer & Co. Alibaba Group Holding Ltd., China’s biggest e-commerce company, is preparing for the largest initial public offering since Facebook Inc.
“The excitement about China’s Internet names can go between now till the IPO of Alibaba as there’s a lot of guesses about which smaller companies might partner up with one of those bigger companies,” Eric Jackson, founder of Ironfire Capital LLC, a Naples, Florida-based hedge fund that invests in Chinese stocks said by phone Sept. 13.
The Hang Seng China Enterprises Index climbed 2 percent last week to 10,538.94. The Shanghai Composite gauge ended the week up 4.5 percent to 2,236.22, the most since February.