New lows are expanding in China

Key points:

• The percentage of 12-week lows for Shanghai Composite members exceeded 50% on Monday
• At the same time, the index remains in a well-established long-term downtrend 
• After similar conditions, the Shanghai Composite index struggled over the next few months

The internal condition of the Shanghai Composite index is deteriorating

After a week-long holiday in China, the sellers returned with a vengeance, which triggered several new multi-month extremes for market breadth indicators for the Shanghai Composite index.

One such indicator is the percentage of Shanghai Composite members registering a 12-week low, which exceeded 50% for the second time in the last few years if we identify the first instance in two months. 

A surge in new lows preceded negative returns for the Shanghai Composite

The Shanghai Composite index struggled across all time frames after 12-week lows exceeded 50%, especially in the 1 to 3-month windows. The expansion in new lows typically occurs within the context of a multi-year downtrend versus a correction within an uptrend.

Don't fight the long-term downtrend

For only the 7th time in three decades, the 200-day average for the Shanghai Composite index has declined for 144 sessions. With the index significantly below its average and the deteriorating market breadth backdrop, the downtrend likely remains in place for the foreseeable future.

For reference, the S&P 500 currently stands at 118 sessions with a declining 200-day average.

A declining 200-day average preceded negative returns for the Shanghai Composite

A well-established downtrend whereby the 200-day average declines for 144 consecutive sessions looks unfavorable across short and medium-term time frames. In every case, returns were negative at some point in the first few months. 

What the research tells us...

Like most indexes around the globe, the Shanghai Composite remains in a well-established long-term downtrend. After a multi-month countertrend rally, the index looks vulnerable to a new cycle low as both internal and external conditions suggest an unfavorable outlook.