China Flushes, The Rest of the World Begins its Financial Swirl to the Bottom

China Flushes, The Rest of the World Begins its Financial Swirl to the Bottom

Regular readers are aware that we’ve been watching the Chinese market as a potential leading indicator for US equity markets for some time.
Our astute readers aside, of course, the average financial slob (or pundit, if you will) seems unaware that the Shanghai Composite topped way back in August. When I posted this chart and question about the strength of the Chinese markets just after New Year’s, I was greeted with a host of comical comments on Seeking Alpha’s syndication of the article (which is typical).
“Wait – isn’t that a quadruple candlestick, poised for a jump to the upside?!”
To be honest – I had no clue. And still don’t. But I can see that China has still not taken out its October highs.
With that, I was pleased (and not surprised) today to see that The Daily Reckoning is also on the beat of China as a leading indicator. Eric Fry writes:
Taking a slightly longer time frame into consideration, the Dow is zero for the last eight trading days…and not very far from zero for 2010. Most European markets are in negative territory for the New Year, as is the Chinese stock market.

So what gives? Do these disappointing performances point to a bad moon on the rise? Is the great big rally that ignited last March about to extinguish itself?

“Probably,” is the answer provided by Jay Shartsis, Director of Options Trading at R. F. Lafferty in New York.

Jay begins his bearish analysis by pointing out that the world-leading Chinese stock market is now leading to the downside. “The important emerging markets of China , Russia and Brazil have topped out already and have been trending lower,” he observes. “They have leading tendencies to our market, having bottomed out before ours did last March. The chart below shows that Chinese stocks (as represented by FXI, an ETF that holds Chinese stocks) [have] traced out a head and shoulder top, and is now rolling over to the downside.”

With China breaking down, global markets may not be far behind.

Ed. note: If you’re not a regular reader of the Daily Reckoning, I’d highly recommend you peruse their site here.

Also, regular DR and Agora readers may enjoy a review we posted a few months ago of Financial Reckoning Day Fallout.