Chart of the Shanghai Composite Index (SSEC) – Source: TheTechnicals.com and TradingView

We’ve been talking a lot about U.S.-China trade lately, but there’s a good reason for that. It’s a primary market driver at the moment. Of course, this will almost certainly change down the road. But for now, all eyes are on the unfolding trade negotiations between U.S. President Trump and Chinese President Xi Jinping. Recently, the news has been pretty much all good. This has helped fuel strong rallies for both U.S. and Chinese stocks. On Monday especially, China stocks surged sharply on U.S.-China trade optimism. The Shanghai Composite Index (SSEC), which is the major Chinese index comprising all stocks traded on the Shanghai Stock Exchange, rallied more than 5%. This was the best single-day gain since 2015. Not an easy feat.

Trump Postpones New Tariffs Ahead of Planned Summit

As might have been expected, Trump postponed the March 1st deadline when the 90-day trade-war ceasefire between the two countries was supposed to end. With this waiver, new tariffs that were slated to be imposed on Chinese imports were also delayed indefinitely. This move was in advance of a planned summit between the two presidents at Trump’s Mar-a-Lago club in Florida in late March.

The Technicals – China Stocks Receive Big Boost

These and other positive developments in U.S.-China trade talks have benefited Chinese stocks substantially. If we take a look at the chart of the Shanghai Composite Index (SSEC) above, the effect on China stocks is clear.

From a technical analysis perspective, the Shanghai Composite formed a double-bottom chart pattern in October and January. This is a bullish chart pattern, but only if price subsequently breaks out above the peak between the two bottoms. And the Shanghai Composite did just that in mid-February. From there, price continued to rise and hit its double-bottom pattern’s measured target on Monday. According to technical analysis, this is simply the price distance between the double-bottom lows to the peak between the bottoms – then projected up from the point of breakout to determine the price target. As noted, this was hit pretty much on the dot on Monday.

Chinese ADRs Also Boosted

An ADR is an American Depositary Receipt. Essentially, it’s a certificate issued by a U.S. bank representing shares in a foreign stock traded on a U.S. stock exchange. ADRs are an easy way for non-Chinese investors to invest in certain Chinese companies. Otherwise, it’s difficult for foreign investors to trade most China stocks directly.

U.S.-China trade optimism has also helped boost Chinese ADRs (tradable in the U.S.). The top-performing Chinese ADRs year to date are as follows:

• IQ (iQIYI) – Year-to-Date Performance (as of the market close on 2/25/2019): 81.64%
• EDU (New Oriental Education and Technology) – Year-to-Date Performance (as of the market close on 2/25/2019): 50.30%
• ZNH (China Southern Airlines) – Year-to-Date Performance (as of the market close on 2/25/2019): 42.19%
• TME (Tencent Music Entertainment) – Year-to-Date Performance (as of the market close on 2/25/2019): 41.83%
• LFC (China Life Insurance) – Year-to-Date Performance (as of the market close on 2/25/2019): 36.89%

What May Happen Next?

By most technical measures, China stocks are back in the bull market territory. The SSEC is now well above its 200-day moving average and the index has risen more than 20% above its recent lows. But is there more upside for Chinese stocks as we approach a likely deal on U.S.-China trade? Or, will this be yet another “buy the rumor, sell the fact” situation. Now that China’s stock market has reached its upside technical target, there may very well be profit-taking and a potential pullback. However, in the run-up to an actual U.S.-China trade deal, the Chinese stock market will likely have significantly more room to rise.