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DeMark Says Chinese Stocks Are at Make-or-Break Inflection Point
Ye Xie
August 25, 2015 — 10:45 PM CEST Updated on August 26, 2015 — 6:23 AM CEST
Shanghai Composite needs to close above 3,200 to avoid selloff
Failure to close above that level clears way for move to 2,590
Tom DeMark, who predicted this month’s selloff in Chinese stocks, said the Shanghai Composite Index may extend its decline by 13 percent should it stay below a critical technical level on Wednesday.
A failure to close above 3,200, or almost 8 percent higher than the Tuesday’s level, may open the way for a move to 2,590, which would be the lowest since November, according to DeMark, founder of DeMark Analytics. An advance above that level, however, would signal the stock rout which has wiped out more than $4 trillion in market value, may be over, he said.
“We are teetering on the edge,” DeMark, 68, who has spent more than 40 years developing indicators to identify market turning points, said by phone from Scottsdale, Arizona. “The pivot point is today.”
Calm has given way to anxiety in the Chinese market since last week on concern that the economic slowdown is deepening while the government is abandoning market support measures.
The Shanghai Composite Index has lost 22 percent in four days, the steepest retreat since 1996, to 2,964.967 on Tuesday. Exchange-traded funds tracking China’s A-shares pared gains later during the U.S. trading, halting a rally spurred by policy makers cutting interest rates for a fifth time since November in an attempt to shore up growth. Futures had indicated earlier in the day that the local market would rebound.
Successful Calls
The Shanghai Composite rose 0.8 percent at the midday break on Wednesday, amid volatile trading that earlier sent the gauge down as much as 3.85 percent.
Demark, who has advised hedge funds including George Soros’s Soros Fund Management and Leon Cooperman’s Omega Advisors, has made several successful calls on the Chinese stock market in recent years. He has said his indicators work best to pick up buy and sell signals in markets where the governments can heavily influenced trading.
DeMark said July 27 that the Shanghai benchmark would fall 14 percent to 3,200 in three weeks as the market demonstrates a trading pattern that mirrors the U.S. crash in 1929. He was correct in his forecast, missing the date by only a few days.
Fibonacci Analysis
In February 2013, DeMark predicted that the index would retreat, one day before it began an almost 20 percent tumble from a nine-month high. Four months later, his call for a bottom in Chinese stocks proved prescient as the gauge hit a four-year low within days and started rising.
In early August 2014, he made a wrong call, forecasting that the Shanghai Composite would fall after rallying about 10 percent from the June low. Instead, the benchmark kept rising, surging more than 130 percent through mid-June.
DeMark said Tuesday that failing to closes above 3,200, the 61.8 percent Fibonacci retracement from the June peak, would confirm that the Chinese market is still following the trading pattern of the U.S. crash during the Great Depression era.
Alternatively, a rally above that level would signal that the Shanghai index is on a similar path as the Dow Jones Industrial Average in 1987 and 2001 when the market carved out a bottom. If that is confirmed in the following trading days, the Chinese market could rally as much as 60 percent and resume the bull market, he said.
1929 Pattern
DeMark made similar statements in February 2014 about trading in the Standard & Poor’s 500 Index mirroring patterns of 1929, saying that if certain conditions were met, U.S. stocks had reached a point resembling the time before the market crash that spurred 85 years ago. The S&P 500 rallied 8 percent over the next two months. He has said that those conditions didn’t materialize at the time.
DeMark’s company makes money by charging traders for access to its indicators. It also sells subscriptions to the indicators on the Bloomberg Professional service.