Shanghai Composite Pressing Against Key Support

Many of the traders and portfolio managers that I speak to are looking at the beleaguered commodity and industrial materials sectors as ripe for reentry on the long side.   They're watching companies like Freeport-McMoRan Copper & Gold (FCX), U.S. Steel (X), Alcoa (AA), Walter Energy (WLT), Mosaic (MOS), Deere (DE), and Caterpillar (CAT), for example. However, my enclosed monthly chart of the China Shanghai Composite gives me pause about such a committment right at this time.

When the Shanghai Comp. begins trading for the month of (Oct.) tomorrow, let's notice that it will be pressing against key July 2011 support at 2,320. That level must contain any forthcoming weakness to avert additional weakness that likely will confront much more important support along the up trendline from June 2005, now at 2,250.

The juxtaposition of my sharply declining 7-month EMA against the falling price structure argues strongly that the China equity market could be entering a downside acceleration period that violates significant near- and intermediate-term support en route to a full-fledged test of its October 2008 pivot low at 1,665.

Such a decline will have very negative implications for China demand for commodities and industrial manufactured goods worldwide. The action of the Shanghai Composite during the next several days (weeks) arguably will be the most important gauge of the "health" of the global economy (while most everyone remains fixated on headline risk emanating from Greece, Europe, and the Fed).