Editor's note: Daryl Guppy is an international financial technical analysis expert. He has provided weekly Shanghai Index analysis for Chinese mainland media for more than a decade. Guppy appears regularly on CNBC Asia and is known as "The Chart Man." He is a national board member of the Australia China Business Council. The article reflects the author's opinions and not necessarily the views of CGTN.

Bargain hunters gather when markets get smashed because in this situation good stocks get taken down along with every other stock. These general market sell-offs are a buying opportunity for some stocks. This week's rebound in the Shanghai Index has as much to do with bargain hunting as it does with the soothing comments coming from the Vice Chairman of China Securities Regulatory Commission who hosted a virtual call with global investment banks. Broader media comments stressed China's stable economic growth which would serve as a strong foundation for the healthy development of capital markets.

The immediate trigger for the sell-off was the decision to strictly limit the operations of the education coaching industry. In reaction to the education industry announcement, the Shanghai index smashed through the support offered by the long-term uptrend line that defined the index activity from March 2021. It's an open question as to how much of this selling was triggered by over-reaction from Western fund managers.

The sharp three-day fall reached a low point and then quickly rebounded to close higher. Individual stocks across the board tumbled irrespective of any connection with the education coaching industry.

The selling also hit companies listed outside of China, such as TAL Education, China's tutoring company, which is listed in New York. The selling came after TAL had already lost three-quarters of its market value in the previous  month. The obvious question to ask is why had the TAL stock price fallen in the previous month? The answer lies in previously announced government decisions.

Although it seemed to come without warning the move was in fact foreshadowed earlier in 2021. In May China passed a set of guidelines to ease the burden of excessive homework and off-campus tutoring for students undergoing compulsory education. Last week the State Council introduced the new regulations.

Some analysts claim the China market is uniquely susceptible to government interference, but this conclusion is incorrect. Markets in the U.S. shudder, shiver and collapse in response to government decisions like the so-called "taper tantrums." Announcements by the U.S. Federal Reserve are closely watched because this government intervention can cause markets to soar, or crash. The current focus on the U.S. 10-year bond rate leaves investors at the mercy of government decisions.

The China market is no different when it comes to government decisions and their impact on market behavior.

The market fall offered several ways for investors to snap up bargains. The first method applies the traditional investment metrics summed by the legendary Warren Buffet. "Buy good companies at cheap prices."

PM Capital, a fund manager that specializes in global equities, bought Chinese stocks through the tumult. "Older-economy stocks like telcos and banks that have traditionally been in state-controlled sectors are trading at historic lows on a relative basis," fund manager Kevin Bertoli said.

Alibaba's flotation in Hong Kong last year is the beginning of this trend which will be accelerated by recent U.S. rulings that make it more difficult for Chinese companies to initial public offering (IPO) in the U.S.

China International Capital Corp (CICC), China's investment bank, is a typical example of the opportunity. The bank will benefit from the trend among Chinese companies which are listed overseas to return to China listings. Sam Le Cornu, co-founder and chief executive of Stonehorn Global Partners, which manages $450 million in Asian equities, noted that "As [companies] come home CICC is collecting on the listing fees. We see there are opportunities there and there will be more that come back to Hong Kong."

The second method used by bargain hunters is trend analysis applied to a chart of price activity. Solid and sustainable uptrend is defined in many ways including the application of a simple trend line, the use of two or more moving averages or a selection of other trend identification techniques. All of these tools are readily available on charting software programs and services. These trend identification techniques all have one feature in common.

A rapid fall in a previously very strong uptrend is most likely to be temporary and an overreaction to a general market retreat. Investors watch for these price retreats to test market support levels. A successful test signals the opportunity for a rapid rebound and resumption of the uptrend. This is a well established strategy of buying on trend weakness and is effectively applied in selected market sectors.

The rapid fall in the Shanghai Index obscured the fundamental long-term strength of the Chinese economy and this makes for fertile ground for bargain hunting investors. The sell-off is a fast disappearing opportunity as the market rebounds from its lows.

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