CHINESE stocks have seen a recovery since early February, erasing the losses incurred during a bearish January when the CSI 300 Index hit a five-year low. This recovery came on the back of Beijing’s intensified efforts to stem the equity rout with a string of policy announcements.
China’s state-backed funds, such as Central Huijin Investment, are buying into exchange-traded funds that track the benchmark to prop up the market. Other measures include tightening regulatory restrictions on its quant trading industry, including freezing the accounts of Lingjun Investment, a major player in the sector for three days. This action was taken after the company dumped a huge amount of shares within a minute of the market opening on Feb 19 when indices fell sharply.
From a technical perspective, investors have reasons to cheer with the CSI 300’s rally expected to extend.
Firstly, the index bottomed out at the 3,100 level in early February with a tweezer bottom bullish reversal candlestick pattern which took place at the descending wedge support. In addition, a bullish divergence signal on the Moving Average Convergence Divergence (MACD) technical indicator supports the bullish price action. This was despite the index retracing lower from January into February, with higher highs and lows formed, which indicate a decline in bearish momentum.
Secondly, the index broke out of the descending wedge technical pattern in early February, taking out the 3,350 swing high level formed in end-January and creating a higher high level which is another indicator of a bullish reversal taking place.
Thirdly, the CSI 300 has started to consolidate its recent gains above the 3,420 level and continued to trade above this horizontal resistance, which coincides with the confluence of a 38.2 per cent Fibonacci retracement level. This retracement level is calculated using the swing high of 4,064 in end-July 2023 and swing low of 3,108 in early February this year. The recent rising momentum was also reflected in the MACD climbing above the zero line for the first time since August last year, adding credence to the bullish reversal price action.
Moving forward, given the several reasons mentioned above, the CSI 300 is expected to experience a further recovery towards the 3,600-3,700 area. This range is confluent with the 50 per cent to 61.8 per cent Fibonacci golden zone and corresponds to a previous horizontal support breakdown and resistance level observed in September and November last year, respectively.
The writer is research analyst at Phillip Securities Research
