China shares closed 1.27 percent higher on Monday, recovering from a 1.3 percent loss on Friday. Airline stocks led the rise after international oil prices fell below $70 per barrel. China Eastern Airlines jumped 7.44 percent to 2.60 yuan after falling for three straight days.
Air China was up 2.53 percent at 2.84 yuan, while Shanghai Airlines Co rose 3.73 percent to 2.50 yuan. The airlines were weak last week after announcing poor first-half earnings. Traders said there was now a feeling that they had become undervalued, even though the oil price drop would need to go further and last for months to return some of the airlines to the black.
Some traders said media speculation that foreign airlines might buy strategic stakes in local airlines, particularly China Eastern, helped boost the stocks. But they said the stocks would remain vulnerable to falling back unless concrete M&A activity occurred.
"As long as restructuring of the airline companies doesn't occur, the trend for airline stocks is unlikely to be stable," said Zhou Lin at Huatai Securities.
However, the short-term technical outlooks for some airline stocks improved considerably, with China Eastern triggering a reverse head and shoulders pattern formed by the August lows and targeting 2.75 yuan.
The benchmark Shanghai composite index closed at 1,657.520 points on Monday, less than a point from its intra-day high. But turnover in Shanghai A-shares was a modest 17.5 billion yuan ($2.2 billion), down from 19.6 billion on Friday.
Zhou and Gui Haoming, analyst at Shenyin & Wanguo Securities, both predicted the index would hover around 1,650 in coming days. It has immediate technical support at 1,620 points, the mid-August highs.
Although turnover remains disappointing, some analysts think technical breakouts by a range of shares could signal further gains in the next few weeks, perhaps to the 1,700 area.
Real estate shares, which led the market up late last month, resumed rallying on Monday. Shanghai-based Lujiazui Finance & Trade Zone Development Co closed at its intra-day high, rising 4.90 percent to 8.35 yuan, the highest price since May 10. Its gain triggered a bullish right triangle formed by the August lows and targeting the 9.30 yuan area in coming weeks. China Merchants Bank Co, the second-largest Shanghai-listed lender, rose 1.8 percent to 8.49 yuan as it began a global roadshow for its Hong Kong IPO.
Zongshen Power Machinery climbed 2.5 percent to 7.05 yuan. The company is in final stages of talks with MTD Products Inc for the US outdoor power equipment maker to buy a 25 percent stake in Zongshen's affiliate Zongshen General Power Machine for up to $63 million, sources familiar with the situation told Reuters.
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