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China and the Elusive Golden Cross

Consider CHIQ for exposure to China's Golden Cross


The Chinese stock market has been the Rip Van Winkle of the world in the last three and a half years, but in the past two months it has awoken from its slumber with a jolt. Since reaching a multi-year low on the first trading day of December, the Shanghai Stock Exchange Composite Index (SHCOMP) is now up 21.5%, which some technicians classify, ipso facto, as a new bull market. So, things are certainly looking up for China with some of the best looking stocks in the consumer space. An ETF that captures them all is Global X China Consumer (NYSE:CHIQ).

Analysts at Bespoke Investment Group note that the gains in the Shanghai Composite have begun to turn its moving averages around, and as long as the index does not collapse over the next couple of trading days, it will experience the elusive “golden cross.”

That sounds like Christian symbolism worthy of a passage in the Da Vinci Code, but it is actually a technical formation that occurs when the 50-day moving average crosses above the 200-day moving average as both moving averages are rising. It just means that momentum that had previously been negative has instead turned positive.

While some technicians rightly pooh-pooh the importance of a golden cross in many cases, for the Shanghai Composite, it has historically been a very positive indicator for future returns. Bespoke analysts have run the numbers and discovered that the Shanghai has only had six golden crosses since 1990, the last one occurring in January 2006.

In the week following a golden cross, the Shanghai has averaged a big gain of 5.57%. Over the next month, the index has gained an average of 3.77% (median 6.4%), and over the next three months, the index has gained an average of 7.27% (median 9.21%).

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