(Bloomberg) -- Chinese equities are once again adrift after a frenzied rally in state-owned firms, leaving traders searching for catalysts to drive the next leg of gains.

The benchmark CSI 300 Index has erased a jump fueled by a rise in state-linked and artificial intelligence stocks as focus reverts to China’s lackluster economy. As a result, turnover in the mainland market has dipped below a key mark, while volumes in Hong Kong are also shrinking. 

The change in sentiment suggests that traders remain wary about Chinese stocks even as authorities pledge to improve state-linked firms’ valuations and vow to allow them to tap more capital. Beijing’s strained ties with Washington and the risk of sudden policy changes are among the long-standing worries.

Here are four charts to illustrate the waning momentum in Chinese shares:

Onshore investors tend to take their cue from their offshore peers and recent flows have provided little inspiration. Foreign funds’ daily net flows via the trading links have dipped below 10 billion yuan ($1.4 billion) since mid-February and are less than half of that on most days. This comes after purchases reached a record 141.2 billion yuan in January to surpass inflows for all of 2022.

The fragile sentiment is also reflected in the tech-heavy ChiNext Index, which has fallen about 20% from a peak reached last July. Only a quarter of all the shares on the gauge are trading above their 200-day moving average, indicating a widespread lack of enthusiasm. That’s a far cry from mid-2020 when the index was a hot trade, thanks to bets on solar and electronic vehicle stocks such as Contemporary Amperex Technology Co. and Sungrow Power Supply Co. 

A weekly reading of the Shanghai Composite Index’s moving average convergence-divergence is emitting bearish signals. The indicator is forming a so-called negative crossover, which suggests that sellers are back in control — similar to an episode in mid-September last year which preceded a bout of losses. 

To be sure, technical indicators suggest that the downside in Chinese equities may be limited. The CSI 300 Index is likely to find support at the 61.8% Fibonacci retracement of its reopening rally. This support has remained intact even after being tested multiple times in recent months, indicating that buyers are ready to dive in whenever there’s a dip.

--With assistance from Mengchen Lu.

©2023 Bloomberg L.P.