Editor’s Note: Daryl Guppy is an international expert in financial technical analysis. He has provided weekly Shanghai Index analysis for mainland Chinese media for over a decade. Guppy appears regularly on CNBC Asia and is known as “The Chart Man”. He is a member of the National Board of Directors of the Australian China Business Council. The article reflects the views of the author and not necessarily those of CGTN.

Bargain hunters come together when the markets are broken because in this situation, good stocks are suppressed along with all other stocks. These massive sales in the market constitute a buying opportunity for certain stocks. This week’s rebound in the Shanghai index has as much to do with the bargain hunt as it does with the calming comments of the vice chairman of the China Securities Regulatory Commission who held a virtual call with the banks of the global investment. The wider media comments highlighted China’s stable economic growth which would serve as a solid foundation for the healthy development of capital markets.

The immediate trigger for the sale was the decision to strictly limit the operations of the educational coaching industry. In response to the education industry’s announcement, the Shanghai Index broke the support offered by the long-term uptrend line that defined index activity from March 2021. It is an open question to what extent this sale was triggered by an overreaction from Western fund managers.

The steep three-day drop bottomed out, then rebounded quickly to close higher. Individual stocks across the board have plummeted regardless of any connection to the education coaching industry.

The sale also hit companies listed outside of China, such as TAL Education, the Chinese tutoring company, which is listed in New York. The sale came after TAL had already lost three-quarters of its market value the previous month. The obvious question to ask is why did the TAL share price drop in the previous month? The answer lies in the government decisions announced earlier.

Although it appeared to come without warning, the move was actually announced earlier in 2021. In May, China adopted a set of guidelines to ease the burden of excessive homework and off-campus tutoring for students. following compulsory education. Last week, the Council of State presented the new regulations.

The exterior view of the Shanghai Stock Exchange in Pudong New Area in Shanghai, east China. / Xinhua

The exterior view of the Shanghai Stock Exchange in Pudong New Area in Shanghai, east China. / Xinhua

Some analysts say the Chinese market is particularly sensitive to government interference, but this conclusion is incorrect. US markets quiver, shake, and crash in response to government decisions like so-called “tantrums”. The US Federal Reserve’s announcements are being watched closely as this government intervention can cause markets to soar or even collapse. The current focus on the US 10-year bond rate leaves investors at the mercy of government decisions.

The Chinese market is no different when it comes to government decisions and their impact on market behavior.

The fall in the market has offered investors several ways to do good business. The first method applies the traditional investment measures summarized by the legendary Warren Buffet. “Buy good companies at a low price.”

PM Capital, a fund manager specializing in global equities, bought Chinese equities amid the uproar. “Stocks in older economies such as telecommunications and banks that have traditionally been in state-controlled sectors are trading at historically low levels on a relative basis,” said fund manager Kevin Bertoli.

Alibaba’s Hong Kong IPO last year is the start of this trend which will be accelerated by recent US decisions making it harder for Chinese companies to go public (IPO) in the United States.

China International Capital Corp (CICC), the Chinese investment bank, is a prime example of this opportunity. The bank will take advantage of the tendency of Chinese companies listed abroad to return to the Chinese lists. Sam Le Cornu, co-founder and managing director of Stonehorn Global Partners, which manages $ 450 million in Asian stocks, noted that “As [companies] come home CICC collects the registration fees. We see that there are opportunities there and there will be more coming back to Hong Kong. “

The second method used by bargain hunters is trend analysis applied to a price activity chart. A strong and lasting uptrend is defined in several ways, including the application of a simple trendline, the use of two or more moving averages, or a selection of other trend identification techniques. All of these tools are readily available on mapping software and services. These trend identification techniques all have one characteristic in common.

A rapid fall from a previously very strong uptrend is most likely temporary and is an overreaction to a general market pullback. Investors are watching these price declines to test support levels in the market. A successful test signals the opportunity for a quick rebound and resumption of the uptrend. This is a well-established buy-on-trend weakness strategy and is applied effectively in selected market sectors.

The rapid fall in the Shanghai index has masked the long-term fundamental strength of the Chinese economy, making it fertile ground for investors looking for bargains. Mass selling is an opportunity that quickly disappears as the market rebounds from its lows.

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