Chinese equities falling, VIX skyrocketing, and rally stalling

Overnight, multiple Chinese stock markets established new lows, setting the negative tone for the European trading session and futures markets in the United States, with all major U.S. indices diving into the negative territory ahead of the regular trading hours. So far, the SPX has failed to get through the psychological resistance of $4,800 and establish new highs. At the same time, other indices like the Nasdaq 100, the Dow Jones Industrial Average, and the Russell 2000 have been moving sideways since late December 2023. It is becoming increasingly apparent that the market’s bullish momentum continues to stall, which follows a period of extremely low VIX and cheap protection to the downside (two things that often precede a downturn in the market). As a result, we are closely monitoring an opening gap in the VIX; if the gap is not closed and the VIX continues to grow, it will strongly bolster the bearish case. The same applies to the decline in MACD, Stochastic, and RSI (plus its failure to break through 70 points) on the daily graph. In addition to that, there are signs of a double-top forming on the daily and weekly chart (not validated yet, though). Therefore, we continue to approach the market with heightened caution.

Illustration 1.01

The image shows three major Chinese stock market indices: the Hang Seng Index, the CSI 300 Index, and the Shanghai Composite Index. The Hang Seng Index has continuously declined since early 2018, while the Shanghai Composite Index and the CSI 300 have declined since early 2021; the performance is measured from the all-time highs until the latest market close.

Illustration 1.02

Illustration 1.02 portrays the daily chart of VIX. The yellow arrow indicates the opening gap in the VIX, a notable event, given its increase of more than 10% from the previous close.

Illustration 1.03

Illustration 1.03 shows the daily and weekly chart of the SPX. Yellow arrows indicate two peaks, which could potentially evolve into a double-top formation.

Technical analysis gauge
Daily time frame = Neutral (turning slightly bearish)
Weekly time frame = Neutral
*The gauge does not necessarily indicate where the market will head. Instead, it reflects the constellation of RSI, MACD, Stochastic, DM+-, ADX, and moving averages.

Please feel free to express your ideas and thoughts in the comment section.

DISCLAIMER: This analysis is not intended to encourage any buying or selling of any particular securities. Furthermore, it should not be a basis for taking any trade action by an individual investor. Therefore, your own due diligence is highly advised before entering a trade.

Comment:

Bloodbath in the Chinese equity market continued overnight, with the Hang Seng Index declining by 6%, the Hong Kong 50 by approximately 4%, the CSI 300 by 2%, and the Shanghai Composite Index by 2%. Due to a potential spillover effect into the Western equity markets, we are on high alert.