DavidBelleFX

What has happened with the Shanghai Class A Index? It's a cycle.

INDEX:XGY0   Shanghai Class A Index
We have a video from last month explaining what is next for the equity markets which was very informative. You can find it here (https://youtu.be/li9ceCKtRBQ), with explanation of the Chinese stock market turmoil and why it has happened.

However, I will briefly explain why China is facing the current situation.

The thinking we had behind this was that many developed equity markets were vulnerable to further falls, whilst at the same time, a bubble was forming in Shanghai, whilst MA in the US was breaking monthly records, none of which individually were necessarily damning. The combination of these events, however, were a cause for concern and on top, we had the Greek situation occurring.

We flagged the High Level of Market Breadth in the Shanghai A Share Index on June 8 2015, which then stood at 89.18%. Essentially, this indicator identifies (in percentage terms) the amount of shares which are bullish . You can find this graph here (http://i.imgur.com/spJMnBb.png). A month on from identifying this, the market share breadth dropped to 18.97, a fall of 78%. This shows how overbought the market was. Coincidentally, large declines in the underlying index value have occurred when the market has neared the 100% level which can be seen here (http://i.imgur.com/Rx9qz6o.jpg). It could be said that the index has further to fall due to possible extended selling pressure, even with a large stock freeze as historically we have seen a market share breadth low of ~2%. The market is quite oversold currently, however We do have time for this to play out, so it will be interesting to see what happens.

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