The Shanghai composite index pulled back another 1.68% on Tuesday to close at 3,663.00, after Monday’s major meltdown of 8.48%. There were reports that brokerages, who extended credit during the crisis, had begun restricting margin trading. The news sparked panic selling, especially among China's neophyte small investors. Millions of small investors who bet on the market with confidence are now losing real money. The pain might not be stopping soon, as the Shanghai composite index could be heading further south to revisit the low 3,000 level, if the 200-day SMA can’t hold.

The fact that the equity market is forward-looking and has traditionally been viewed as an indicator of the economy, a large pullback in the Shanghai composite index could be reflective of a future economic downturn, or vice-versa. Historically, most recessions are accompanied by stock market declines of 30% or more, meaning levels below 3,624.73 on the Shanghai composite index. 

China may want to retry to put a floor on the markets. The latest attempt was from the People's Bank of China (PBoC), as the bank provides liquidity to the government-owned margin lender China Securities Finance Corp (CSFC), so that the CSFC can give credit lines to 21 brokerage houses to purchase Chinese equities to stop the markets from crashing further. The IMF urged China to exit measures to prop up stocks but no one seems to be listening.