CSI300 closes second time 7% down on high volume

CSI300, major China stock indices down

The Shanghai Shenzhen CSI300 Index closed early second time this week after trading down 7% in less than 30 minutes. First incident happened on Monday first trading day of 2016. Shanghai Shenzhen CSI300 Index is a stock market index designed to replicate the performance of 300 stocks traded in the Shanghai and Shenzhen stock exchanges. China’s major stock indices are down across the board.

All major China stock indices down drastically

All major China stock indices down drastically | Source: 大智慧


High volume sell to lead to more

Market corrections/crashes take on a life of their own especially when price is down this magnitude on high volume. As price falls, margin calls kick in which forces more selling by over-leveraged buyers. In the absence of buying interest, spreads may also widen for illiquid stocks.

What is notable in the 5-minute chart below (showing intraday action) as well as the price action on Monday is the absence of retracement after the first 5% halt. In my opinion, this says that selling action was not committed by short-selling speculators who have interest to cover their positions (which leads to buying). The absence of any retracement is a worrying sign that there is a genuine exit of investors who throw in the towel – a sign that we are going to see some more correction which I pointed out on Monday ‘China’s remorseless stock selling to lead to more‘.

If intraday is a guide, this bearish action is going to follow through.

  1. If the earlier action is a result of short selling, we are likely to see some short covering after the first 15 minute halt.
  2. Without retracement, market resumed falling with falling index-rising volume in all of 6 minutes.

This kind of remorseless selling with high participation is going to lead to some more. Finally note what I wrote about Shanghai Composite back in October 2015 (hint: also about high volume).

CSI300 closes early for day after losing 7% in less than 30 minutes of trading

CSI300 closes early for day after losing 7% in less than 30 minutes of trading | Source: 大智慧

Since high volume indicates more selling to come, volume is also the best indication that selling may be over – when that volume dries up.

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