China’s Stock Rally Hits ‘Exhaustion Point’: Technical Analysis

(Bloomberg) -- China’s stocks rally may have reached an “exhaustion point” after the benchmark index last week rose to a 13-month high, DMG & Partners Securities Pte said. The Shanghai Composite Index climbed to 3,221.07 on July 16, which was the highest since June 2008. Further advances may be unsustainable as the measure nears resistance in the upper Bollinger band and the 161.8 percent Fibonacci extension of an earlier wave of gains, to between 3,231 and 3,245, DMG’s Singapore-based analyst James Lim said in a report today.The government’s 4 trillion yuan ($585 billion) stimulus package and record bank lending have helped the Shanghai Composite Index soar 75 percent this year, making China the world’s best-performing major market. Gains last week helped China briefly overtake Japan as the world’s second-largest stock market by value for the first time in 18 months.

“Given the steep climb and increment, we now believe that the current Wave 3 may have already reached exhaustion point,” Lim wrote. “The risks are clearly against those who are looking to buy into the market at present levels.”Bollinger bands, a technique developed by analyst John Bollinger in the 1980s, use historical volatility to set upper and lower targets either side of the moving average price of a commodity, currency or security. Fibonacci analysis uses ratios, which are based on the sequence identified by an Italian mathematician in the 13th century, to predict support and resistance levels for prices.The index may find support at around 3,076 and 3,088, representing a decline of as much as 3.6 percent from last week’s close, the analyst said. Support may be available between 3,011 and 3,015 should the index fall further, he added.

The Shanghai Composite’s 14-day relative strength index, measuring how rapidly prices have advanced during the specified time period, rose to 77.4 at 10:11 a.m., according to Bloomberg data. The RSI has been above 70, a level that some investors view as a signal that the gauge is poised to fall, since July 14.