The FTSE China A50 Index Could Become the China A100

The FTSE China A50 is a tradable index which comprises of 50 of the largest A-Shares according to market capitalisation. It is frequently used as a hedging tool by international traders who seek protection for their Chinese equity exposure. In response to investor feedback, the index may be revamped to include the 100 largest companies listed in Shanghai and Shenzhen to offer broader protection for overseas hedgers. However, the move is also likely to be to counter the launch of the MSCI China A50 Connect Index last month, the first product of its kind by HKEX (Hong Kong Exchanges and Clearing Limited).

We can see the performance over the past 3-months of the 10-largest companies within the index has been quite mixed. Kweichow Moutai (600519), which accounts for around 1% of the A50 has been effectively flat over this period. Like the A50 is has pulled back from the October high but could be forming a bullish wedge formation on the daily chart, although we are not yet convinced the bullish reversal pattern has seen its final low. Meanwhile, Ping An Insurance (601318), which accounts for around 9% of the A50 has fallen over 20% which places it in a technical bear market. Overall, this tilts us to a bearish bias on the China A50 over the near-term.

We can see on the daily chart that the China A50 has carved out a basing pattern around 14500 before breaking trend support. A bullish divergence occurred over this period to further suggest a longer-term reversal was forming. However, the index remains in a countertrend move since it failed to break above 16,400 and 200-day eMA.

With prices now back beneath the monthly pivot point and 50-day eMA, we have a bearish-bias below 15,715 over the near-term.
We are now looking for the retracement to bottom out above 15,000 or somewhere along the broken trendline.
Given the long-term basing pattern and buy-signal on the weekly MACD, we expect prices to eventually break above 16,400 resistance once the current corrective phase is complete.
A break back above 15,715 switches our near-term bias to bullish.

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