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If stock markets are discounting mechanisms, China’s SSE 50 index is not giving us positive signals for the chinese economy and possibly for the global growth. At a time when almost everyone is expecting China to lead the global growth and help the rest of the world, weak stock market performance is telling the opposite… that China might be facing more trouble. SSE 50 index has been falling below its 200 day moving average and lately confirmed its downtrend by breaking below its 2010 low levels at 1,780. RSI has clearly established its move below 50 levels (a sign of a bear market). Lower lows and lower highs has formed a medium-term trend channel and the lower boundary of the trend channel is between 1,450 and 1,500. Expect further weakness in the Chinese stock exchange and  the index to reach the lower boundary of its medium term trend channel.

The longer price stays below the 200-day moving average the harder it gets for the long-term trend to reverse and the price to move back above the resistance areas. This could be the case for most of the equity markets as major equity indices are now forming consolidation ranges below their long-term moving averages. Bearish outlook remains intact and suggests these chart patterns could resolve on the downside for several equity markets. Canada’s S&P/TSX Composite Index reversed its 2 year-long uptrend in August 2011 with a long weekly bar that breached 13,000 levels. Since August the index couldn’t move back above 13,000 and during the same time the long-term moving average (200-day) declined to 12,550 levels. Unless the index breaks above the 200 day moving average and out of the sideways consolidation range Canadian equities would see more downward pressure. Watch this consolidation range with a bearish bias and place a long-term stop-loss at 12,550 levels.

Emerging market equities are showing weakness. Most of them are off of their 2011 high levels, below their long-term moving averages and in a downtrend. One example is Korea’s KOSPI Index. Weak and choppy rebound towards the 200-day moving average has formed a rising wedge (usually considered bearish). Meanwhile RSI hasn’t moved above the 50 levels (another bearish sign). When combined together; – below 200 day moving average – rising wedge pattern and – RSI finding resistance at 50 levels, it is not a bullish outlook for Korea. If the index breaks below 1,750 level it will confirm the rising wedge and we are likely to see lower prices towards 1,500 levels.However a sustained break above 2,000 levels should be positive for the intermediate term trend.

US Dollar is gaining strength against developed and emerging market currencies. Some believe that US economy is not strong and its currency can’t appreciate in value while others argue that what happened in 2008 can repeat and a massive de-leveraging can increase demand for the dollar. I’m in the second camp. As I go through my charts I’ve been seeing more and more emerging and developed market currencies forming major base formations (H&S, double bottom, rounding bottom etc.). One perfect example is USD/ILS. Though it might not be the best example given the liquidity and accessibility of this pair, it is a perfect example of symmetry and text-book inverted H&S pattern. Shekel has formed a clear inverted H&S pattern with the neckline as resistance at 3.78 level. The H&S pattern is very similar to the one that formed in 2008.

A confirmed breakout above 3.78 will push the cross rate towards 4.2 levels. This will signal dollar strength versus many other currencies.