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Equities may 'extend losses' in weeks ahead

(China Daily/Agencies)
Updated: 2010-02-24 10:44

China's stocks may extend losses in "coming weeks" as the Shanghai Composite Index runs into resistance at a moving average, according to CIMB Investment Bank Bhd.

The 200-day moving average of 3,021 was previously a major support level for the benchmark gauge, CIMB analysts Nigel Foo and Kong Seh Siang wrote in a report Tuesday.

The index also faces resistance at its 50-day moving average of 3,139 and its triangle support-turned-resistance line at the 3,175 to 3,180 level, the analysts said.

The Shanghai Composite has slumped 9.7 percent this year, the most among major Asian benchmark indexes tracked by Bloomberg, on concern the government will raise interest rates and curb lending to cool the economy and avert asset bubbles.

"The medium-term outlook remains negative after the triangle breakdown in January," the CIMB analysts wrote. "A change in our view is likely only if the index is able to break above its triangle resistance line. Otherwise, we expect to see more downside in the coming weeks."

Resistance refers to the upper boundary of a trading range, where sell orders may be clustered, while support is where there may be buy orders. A triangle pattern is formed when upper and lower trend lines intersect.

Stocks elsewhere in Asia may gain, with the MSCI Asia excluding Japan Index set to climb to around 462 to 470, its 38.2 percent and 50 percent Fibonacci retracement levels, the analysts wrote.

The MSCI regional index has dropped as much as 12 percent from this year's high and last traded at 456.18.

March retreat

A "strong rebound" could see the index testing its 61.8 percent retracement at 478 before retreating again in March, the analysts said. Still, a break below this month's low of 435 would indicate the start of the next "down leg", which may take the measure to as low as 375, according to the report.

Fibonacci analysis is based on the theory that prices rise or fall by certain percentages after reaching a high or low. The ratios are based on the sequence pioneered by 13th century mathematician Leonardo Pisano Fibonacci and used in technical analysis to determine highs and lows for prices and predict direction. They include 23.6, 38.2, 50, 61.8 and 76.4 percent moves.