MONTREAL - This week's gyrations on the major Asian equity exchanges strikingly
confirm the "trifurcation" hypothesis that I proposed in my analysis last week
(see Forks in
the market, Asia Times Online, July 24, 2008). There, on the basis of
empirical data, I suggested that fluctuations in volatility and in amplitude of
change were following regional patterns in Asia that neither the industrial
structure of national economies nor the flows of trade could at first glance
entirely explain. Due to the fact that the most volatile exchanges are all
reaching critical tests of one or another sort, I will mainly discuss only them
this week.
I had suggested that three groups have formed themselves in the Asian markets:
one composed of India and China the most
sensitive; another, Australia and New Zealand, the least sensitive; and a
middle group that is itself trifurcated. In this middle group, Hong Kong and
Taiwan have tended towards the greater sensitivity of the India-China duo;
Singapore has tended towards the lesser sensitivity of the Australia-New
Zealand duo; and South Korea and Japan have represented a relatively autonomous
middle of this middle group. Even in the current week, which by recent
standards was relatively placid for Asian stocks, this schematic template holds
up very well.
For example, Mumbai, Shanghai, and Taiwan were three of the four most volatile
markets; Shanghai, Taiwan, and Hong Kong were three of the four hardest hit by
declines. The volatility measures for Australia, New Zealand, and Singapore
were comparable, although this week Tokyo and Hong Kong were less volatile
(Even though the Hang Seng was the third-worst percentage loser on the week,
its decline was rather steady.) Tokyo and Seoul were right in the middle of the
range in terms of percentage loss, although their volatility varied this week,
as Tokyo was one of the least volatile and Seoul one of the most.
The key to the week was how each exchange responded to its Tuesday decline,
itself a knock-on effect of Wall Street's Monday. Asian declines on Tuesday
ranged from -0.7% in New Zealand to -3.9% in India, with the average being
-1.9%. On Wednesday, however, four exchanges gained back more than their
Tuesday loss: Australia, Hong Kong, Tokyo, and Singapore; Mumbai (although it
was the largest Tuesday loser) and New Zealand took two days but succeeded in
rebounding more than they lost; and Seoul took two days to claw back most of
the Tuesday loss.
Shanghai and Taiwan never gave themselves a chance. Indeed, Shanghai and Taiwan
are set to close as the two largest losers on the week, respectively down 4.6%
and 3.3% at mid-afternoon local time. Their closest competition for the honor
is Hong Kong, down only slightly over 2.0%. If the Shanghai and Taiwan
exchanges were in hospital, the former would have by now been moved into
intensive care and the latter placed on round-the-clock observation. This week
Shanghai opened every morning within 0.9% of its daily high and closed every
day within 0.5% of its daily low, even on Monday, its only up day on the week.
Next week Shanghai is likely to come to a critical short-term juncture, with
significant implications for the medium and even long term. Over the past two
months, the range 2,920-2,940 has established itself as a resistance against
any attempt even to seek to breach the 3,000, the level that any attempt to
recover from the early-June gap down (from 3,600) has to establish as a
launching pad. At the same time, ascending bottoms from July 3 through July 17
to the present provide rising support from 2,785 on Monday to 2,820 on Friday
next week. But the Shanghai index is below this line at 2,732 as of Friday
midday, strengthening to just above 2,800 shortly before the close.
Shanghai will either ride these ascending bottoms through the resistance in the
2,900s to challenge 3,000 again, or it will hit its head on the resistance and
lose the ascendant support. I have several times (for example, see
Much ado about nothing, Asia Times Online, July 26, 2008) referred to
the 2,600-2,700 range as a last crucial technical support before 2,000-2,100.
Established in early 2007, the whole range is actually 2,600-3,000, but the
chart shows the 2,800 midpoint of this range as a strong dividing line between
strength and weakness. Shanghai has spent three of the last seven weeks below
that midpoint and may now be facing its last chance to keep its head above
water.
If Shanghai sinks, it could pull Taiwan and Hong Kong down with it, the former
sooner and the latter later. On Tuesday and Friday this week, Taiwan fell below
its long-term support at 7,000 (even to 6,900 on Friday) but never closed
significantly below it, although finishing the week at 7,003. Its short-term
descending-tops resistance line from May will cut through the 7,000 level by
the end of next week. All other things being equal, the longer-term and
well-established 7,000 level should hold, but spillover turbulence from
Shanghai could upset this pattern and leave the outcome in doubt, or worse.
However, as I explained earlier this month (see
Whole lotta shakin' goin', Asia Times Online, July 10, 2008), this
support range could actually be considered to extend as far down as 6,800, so
it is unlikely that all will be lost immediately if at all.
A few final words on Hong Kong are in order. The Hang Seng is in danger from a
classical "descending triangle", tracing highs down from November 2007 through
May 2008, the trend-line now passing through 24,000. On the other side, the
Hong Kong index has a medium-term support, already once successfully tested, in
the 21,200-21,400 range, with backstop from 20,500 to 21,000. Of course, the
longer it waits to try to push up through the descending-tops line, the more
anxious the supports on the downside will become. However, it is entirely
conceivable that a definitive test of these trends may not come until early
autumn.
In closing, let me offer just a few remarks on the other most volatile index of
the week, the BSE Sensex 30 in Mumbai. The medium-term chart is no more
promising here. The index remains range-bound between 13,400 and 15,100,
gyrating this week around the support/resistance at 14,100. What is ominous is
that a descending-tops trend-line is coming down to reinforce the resistance at
14,800 that marks the beginning of the range spreading up to 15,100.
That descending trend-line will cut through this range beginning in mid-August
and below 14,800 by the end of the first week of September. Between 14,100,
where the Sensex was early on Friday, and 14,500, to which it rose by midday,
is however, nothing but a messy gyre. The danger is that the index will lack
enough momentum to do anything other than wait around at the present level
until the combined descending trend and upside resistance kick it down further
to the next support at 12,500 to discover its fate there.
R M Cutler is a Canadian international affairs specialist.
(Copyright 2008 Asia Times Online (Holdings) Ltd. All rights reserved. Please
contact us about
sales, syndication and
republishing.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
