(Bloomberg) — An unprecedented plunge in the Nasdaq Golden Dragon China Index is opening up the possibility of a rebound for the bravest China bulls.
China’s regulatory crackdown sent the 98-member gauge down 46% in the past six months. The depth of the decline raises the possibility that bad news has been priced in, creating the potential for a turnaround.
The index jumped 8% Tuesday, rising for a third day. A revival in Chinese technology stocks paused Wednesday in Asia. The following charts highlight technical signs that the gauge’s drop since February may be overdone.
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Decade-Long Support
The Nasdaq Golden Dragon is closing in on a logarithmic trendline originating from the credit crisis lows of 2009. The gauge has previously bounced back from this 12-year support line to remain in a long-term uptrend. The one caution for investors may be that previous episodes involved a number of bounces before sustained liftoff was achieved.
“News flow — and therefore price action — is likely to remain volatile in China but a lot of concern has been priced,” Timothy Moe, chief Asia-Pacific equity strategist at Goldman Sachs Group Inc., wrote in a recent note.
Too Deviant
Regression analysis signals less downside scope based on a three-standard-deviations channel drawn from the gauge’s 2012 lows. The index is now two standard deviations below the middle of the channel. The last three lows — circled below — bottomed out at two deviations after a slight overshoot. That pattern is apparent in the current decline.
Relative Strength
An analysis based in part on the relative-strength index signals the Golden Dragon is oversold and history suggests a climb back past 40 is a signal for bulls. Since the 2009 crisis, the index has mostly done well whenever the weekly RSI recovers beyond 40. In that event, the average return 13 weeks out is 11.5%. Gains were seen for 16 of 19 instances, with average returns on wins at 15.8%. The three losses averaged 11.3%.
(Updates with markets in the third paragraph.)
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