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Chinese stocks are beginning to show ‘cracks.’ Here’s what it means

China’s stock market has been steadily rising all year, but according to one technician the charts are beginning to show signs of weakness.

The index has declined a little more than 2 percent in the past week, and is showing “a few cracks” after a solid monthslong upward trend, said Miller Tabak equity strategist Matt Maley. This recent weakness comes on the heels of a sharp downturn late last week.

While the Shanghai composite is still well above its lows hit in 2016, it has dipped below its trend line from this spring, Maley said Monday on CNBC’s “Trading Nation.”

“It’s also breaking below the bottom end of what’s called a broadening top formation, or a ‘megaphone’ formation. These formations are quite rare, and the fact that it’s breaking below that is little bit of a concern,” he said.

Part of this decline comes as China has made efforts toward deleveraging and controlling its high levels of debt, Maley said.

“Now that their National Congress is behind them, they seem to be back on that trail of deleveraging,” he said, adding that rates on Chinese bond yields have risen meaningfully in the last couple of weeks.

The recent downturn in Chinese equities appears to be a period of consolidation after advancing for the bulk of this year, said Max Wolff, chief economist at the Phoenix Group. Indeed, the index has advanced a little more than 7 percent year to date.

“Clearly, China has had a pretty good run until fairly recently. That being said, there were these sort of hangovers that have been with us a long time, about the ability to organically sustain the growth rate,” Wolff said Monday on “Trading Nation.”

China reported third-quarter gross domestic product last month that met expectations, though reflected a slightly smaller expansion than the quarter prior.

The Shanghai composite rose modestly on Tuesday.

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