Markets

'Correction' in China stocks nearing its end

By Shiyin Chen (China Daily)
Updated: 2010-06-01 08:59

SINGAPORE - A "correction" in Chinese stocks that has made them Asia's worst performers this year may be nearing its end given the duration and degree of the slump, according to Elliott Wave International Inc.

The current leg of declines in the Shanghai Composite Index has lasted 40 weeks, similar to an earlier stretch of gains, while the declines have amounted to almost half the magnitude of the previous rally, Elliott Wave said.

"These price and time relationships should mark the end of the correction in the index," the researcher said in its June Asian-Pacific Financial Forecast report.

The Shanghai Composite has dropped 19 percent this year as the People's Bank of China raised bank reserve requirements and policy makers stepped up curbs on property speculation.

The gauge entered a so-called bear market this month after declining more than 20 percent from the November peak, and is the only index in Asia among the 10 worst performers worldwide, according to data compiled by Bloomberg.

A gauge tracking small- and medium-sized companies on the Shenzhen Stock Exchange has also retreated to near the fourth leg of a smaller wave, a level that often signals the end of a sell-off, the researcher said.

Elliott Wave also identified a similar pattern in China Cosco Holdings Co's price graph, saying that shares of the world's largest operator of dry-bulk vessels have retreated in an "orderly" three-wave decline.

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"The strong relative performance of this stock is another reason why we believe that China's immediate future is still bright," according to the report. "If the Chinese economy were going to collapse, this stock would likely be plunging."

Elliott Wave Theory

Elliott Wave Theory, created by US market analyst Ralph Elliott in 1938, attempts to predict future price moves by dividing past trends into sections, or waves, and calculating changes in value.

In addition to the technical analysis, the research firm cited "outbreaks of incomprehensible behavior" as evidence that negative sentiment in the nation may be "approaching an extreme". The "concentration" of suicides at Foxconn Technology Group's factories in China as well as an increase in gloomy forecasts from foreign fund managers are among "negatively charged anecdotal evidence that the correction is near an end".

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