MARKETS SPECTATOR: Red rag to a bull market?

The Australian market has started the week on the back foot today, with losses accelerating as the Shanghai Composite opened the week down more than 2 per cent.

The trigger, it seems, was the announcement on Friday from the Peoples Bank of China (PBoC) that it was implementing new measures to curb property speculation including higher down payments and mortgage rates in cities, as well as a tightening in enforcement of a 20 per cent capital gains tax on property transaction.

The weaker-than-expected economic data on Friday looks to have also drained some of the short-term confidence in the Chinese economic recovery. Evidence to suggest the Chinese economy had bottomed over the last six months was one of the big driving factors behind the resurgence in global equity markets.

Now, Chinese data looks to be taking a bit of a breather following its impressive rebound, which has had a domino effect on the Shanghai Composite. These rebounds in data are never a straight line and it was only a matter of time before we saw a bit of an easing in the upside momentum.

So this has translated into a pullback of about 5.8 per cent in the Shanghai Composite, which to put it in context is perfectly healthy and normal following a 25 per cent gain in eight short weeks. As you can see above, the index ran into selling pressure around the resistance line and has now pulled back to the red support line, where we'll likely see a pickup in buying interest. Whether or not it finds enough buying support here or falls a bit further towards the green support line is anyone's guess really.

What I do note as very encouraging is the big pickup in volumes when the market was rallying and the subsequent drop off we have seen during the last three-week pullback. It's always a good sign when a market moves higher on expanding volumes and retreats on decreasing volumes.

To me, at this stage it looks like the Shanghai Composite is seeing a shakeout of the weak 'longs' as they look to lock in a quick profit.

Interestingly, as you can see in the above chart the S&P/ASX 300 Metals and Mining index has fallen approximately 8.7 per cent since the Shanghai Composite formed a short-term top some three weeks ago.

For the overall market, I think this is quite important as I think it's going to be more difficult for the leaders of the recent rally to push the market meaningfully higher. It's going to be much easier for the market to push higher with the participation of the miners, or at least with them holding their own as opposed to retreating.

So it will definitely be worthwhile watching the Shanghai Composite for signs of a low and what it might mean for the broader Australian index.