Take Heart, China: Stock Momentum Gauge Is at Rebound Level

New Institutions Boost China’s Status
  • Relative stength index just above oversold territory
  • Rarely dips below oversold level and usually recovers quickly

The Chinese stock market rout drove a key measure of momentum to a level where the Shanghai Composite Index routinely bounces back, and that’s just what it did.

After suffering its worst ever first trading day of the year with Monday’s 6.9 percent plunge, the Shanghai Composite’s relative strength index ended trading Monday at 31, one point above what’s considered oversold territory. In the past five years, it’s only closed below 30 on less than 5 percent of the trading days, and never for more than two weeks.

On the lower chart, below green (30) is considered oversold, above red (70) is considered overbought.
On the lower chart, below green (30) is considered oversold, above red (70) is considered overbought.

And, sure enough, after both the benchmark and the RSI dipped a bit more on Tuesday, both bounced back in Wednesday trading, with the Shanghai Composite rising 2.3 percent and the velocity measure back above 38.

china rsi2
china rsi2

The indicator is deemed to have sent a buy signal when it crosses 30 from below. An RSI value greater than 70 indicates the stock is overbought, and a sell signal is usually triggered when the gauge crosses 70 from above. The Shanghai benchmark’s RSI was in overbought territory for weeks late in 2014 and again in 2015 before the market tanked in August.

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