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The SET broke through the key technical support at 1,313, to close at 1,301.06 on Monday, down 4.73% for the day, following China's benchmark Shanghai Stock Exchange Composite index 8.46% meltdown. This is how it all went wrong. China's regulators announced late Sunday that it would allow pension funds managed by local governments to invest in the stock market for the first time. The move could potentially channel hundreds of billions of yuan into the struggling China equity market.
It can get confusing very quickly about who really started the selling. For the record, the China equity market took a cue from the U.S. stock market’s 3% plus sell-off on Friday. The Shanghai Stock Exchange took a huge nosedive right at the opening on Monday. China's neophyte individual investors speculated that the China regulators were letting markets dive further to provide a lower entry point for domestic pension funds. After individual investors saw no evidence of any attempt by state-connected funds to buy into the market, they started panic selling. So there you have it. One of the problems is that there are hardly any institutional investors and financial advisers in China, so investing is still haphazard, more or less.
U.S. and European markets tumbled on Monday following the sell-off in Asia. The volatility was exacerbated, as the liquidity is poor in August and September and most of the trades are computerized. Trading by small boutiques, known as high-frequency (HF) trading, can execute millions of sell- and buy-orders per second. HF trading can drive the price down 10% to 15% within seconds.
There could be spillover to the Asian markets on Tuesday. The ascending wedge breakdown for the SET is confirmed and the conservative projected target is at 1,250. One may want to pay attention to the 1,296 support level as it represents a 20% correction, or bear market territory.
The Relative Strength Index (RSI) and the Moving Average Convergence/Divergence oscillator (MACD) are 16.03 and –30.263, respectively, meaning the SET is extremely oversold. Nonetheless, we may want to see the MACD at around –50 before calling a bottom.
One should keep an eye on the U.S. Federal Reserve, the PBoC and the Bank of Japan in the coming days. The S&P 500 Volatility index, or VIX, surged 90.12% to an intraday high of 53.29 on Monday. The spike in the VIX should now shake the U.S. Federal Reserve out of their beds and act accordingly, as a VIX level between 25 and 50 is usually a signal for big trouble ahead in the U.S. and for the global economy. |
