Are Chinese Stocks About to Give Back All of Their 2019 Gains?

Following a remarkable 39% gain from its December lows, China A50, an index made up by mainland Chinese shares, dropped sharply and at the time of writing they had slid by 12.55% from their 2019 high. The price had also reached the price target of a head and shoulders pattern formed in April and triggered on May 6. The pattern suggested a 6.2% decline.

The outlook going forward remains bearish unless the Chinese and U.S. governments compromise as an increase in tariffs could lead to a decline in consumption and higher inflation in the US and China.

On Friday, tariffs on US$200 billion of Chinese goods could increase from 10% to 25%, and the remaining US$325 billion of Chinese goods that have not been affected by tariffs could see duty added to them at the rate of 25%.

Per the April head and shoulders pattern the China A50 is short-term oversold, but looking beyond the near term, the China A50 could be in the process to carve out a major head and shoulders pattern that is projecting that prices could slide as low as their 2019 lows. For more on the rationale behind this view and the risks, please watch the video below.

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