Some Optimism over China Stocks Bouncing Back

Sentiment surrounding China’s equity market couldn’t get much worse. Negative chatter reached a fever pitch ahead of Thursday’s rebound, which has chartists—who evaluate securities based on price rather than fundamentals—paying attention because important lows are often formed when bearishness is at extremes.

It is difficult to measure sentiment in a market that lacks convenient transactional gauges like the CBOE SPX Volatility Index, but bearishness is clearly prevalent when you consider the swift and sharp nature of the recent decline in Chinese stocks and the attention that it has drawn.  The correction in benchmarks like the Shanghai composite index has raised fears of a market crash in China, particularly noting the government intervention that has occurred.

Of course, the percent declines have been significant, surpassing the 20 percent threshold that is commonly acceptable for counter-trend moves in the U.S. equity market, and far exceeding the magnitude of the correction in Europe’s beleaguered equity market. However, without minimizing the damage that has already been done to investors’ portfolios, technical analysis does not support the view that something much worse than a correction (i.e., a lasting bearish reversal) is unfolding.