Shanghai composite index forms a bearish flag pattern
The Shanghai Composite and China A50 indices drifted upwards slightly as the market reflected on the strong services PMI and the new rescue package of the real estate industry. The blue-chip Shanghai index jumped to RMB 3,241, a few points above last month’s low of RMB 3,171. Still, it remains ~5.5% below the highest point this year.
China real estate rescue package
The Chinese economy is not recovering as fast as most analysts were expecting earlier this year. Last week, manufacturing PMI numbers showed that the sector remains under pressure as internal and external demand faded.
On Monday, further data revealed that the crucial services sector was doing better. The services PMI data came in at 57.1 in May, higher than the previous 56.1.
Most importantly, base metals that are seen as a barometer for the Chinese recovery have all tumbled. Copper, aluminum, and iron ore have all slipped to their lowest levels in months.
Most of this performance is because of the real estate sector, which contributes substantially to the GDP. In the past few years, demand for houses has been waning following the collapse of Evergrande.
Now, Beijing is focused on reviving the sector by changing some of the existing commissions. Some of the new changes are reducing the downpayment required to purchase homes in some cities and lowering agent commission on transactions.
Watch here: https://www.youtube.com/embed/Y2uJWTGxBRo?feature=oembedFurther, the government is considering restrictions for residential house purchases and simplifying the acquisition process. It hopes to change the fortune for companies in the sector. Still, there are concerns about whether these policies will have an impact on the sector.
Meanwhile, analysts at Morningstar believes that Hong Kong and Mainland China stocks are trading at a significant discount.
Shanghai Composite index forecast
The daily chart shows that the Shanghai index has drifted downwards in the past few weeks. Recently, however, it has attempted to recover and moved slightly above the key resistance point at 3,220, the lowest point in March and February.
The 25-day and 50-day exponential moving averages have made a bearish crossover while the index has formed a bearish flag pattern that is shown in blue. Therefore, there is a likelihood that the index will soon have a bearish breakout as sellers target the next resistance point at 3,168, the lower side of the bearish flag pattern.
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