The recent rally in Chinese stocks has been particularly rewarding for trend followers. The China A50 is on track to close higher for 11 days in a row, translating to a jump of around 24% over this period.
Part of this rally was sparked by the move from China’s central bank to cut interest rates last month, the first time in more than two years.
The feds’ speculation of further stimulus measures on the horizon that would revive economic growth and ultimately lend some support to stocks.
The case has certainly been building for another stimulus move by the People’s Bank of China (PBoC). Expectations are high that the central bank will follow last month’s rate cuts with a reduction in the reserve requirement ratio. This will make more funds available for lending and complementing the earlier move to lower the cost of funds.
The likelihood of another stimulus move will likely increase as growth continues to stutter. So far, indicators for November are pointing to a slugging manufacturing sector. Earlier this week, China’s manufacturing PMI for November fell to 50.3 – an eight-month low. There was little traction in yesterday’s non-manufacturing PMI figures, which rose slightly from 53.8 to 53.9.
Despite this sluggish picture of growth, Chinese stocks have been on steroids as investor’s price in effects of potential stimulus.
On a weekly chart, the China A50 Index can be seen edging towards to a potential resistance level of around 9230 points, which is the previous high formed in 2013.
Investors can watch out for a possible pullback as it tests the resistance level. A clear break above this level would suggest the momentum would likely continue and provide some confidence to investors to enter long. In this scenario, the key psychological level of 10,000 points will be the next target resistance area to watch out for.