The rebound from the recent market dip in the US has been much more rapid than expected. The tests of support near 9,600 on the Dow Jones Industrial Average were successful and have provided a springboard for a rapid rally above the significant technical resistance level at 10,200. This appears to have broken the behavioural nexus between the Dow and the Shanghai Index.
2 comments:
Handling the China trend
Daryl Guppy
17 November 2009
The rebound from the recent market dip in the US has been much more rapid than expected. The tests of support near 9,600 on the Dow Jones Industrial Average were successful and have provided a springboard for a rapid rally above the significant technical resistance level at 10,200. This appears to have broken the behavioural nexus between the Dow and the Shanghai Index.
However, a move from support at 10,200 to the inverted head-and shoulder target pattern near 11,600 signals a 7% up move. The move for the Shanghai Index from support at 3,000 to the chart pattern target near 3,500 also gives a 7% up move.
The pattern of the trend relationship between the Shanghai Index and the Dow continues, but the exact duplication of features has been negated. The trend correction in the Dow was a small correction in price and there has been no trend correction using time. Traders must be alert for developing relationships in markets, and for the change in those relationships.
The dominant pattern in the Shanghai Index is the cup and handle pattern, which will take several months to develop and to reach the upside targets. The development of the pattern is complicated by the position of the medium-term uptrend line. This trend line will continue to play an important role in the development of the cup-and-handle pattern trend breakout.
The cup segment of the pattern is formed by a reversal in confidence and investor sentiment. The curved line most accurately captures this change. When price moves above the upper edge of the cup pattern, the pattern can develop in one of two ways. The first potential development is a rapid breakout with strong price acceleration. This signals a rally-style trade with strong but short-lived momentum.
The second potential development is a handle pattern, which develops when the cup pattern breakout appears to fail and price retreats. The retreat is defined by two down sloping parallel trend lines. The degree of the fall is usually less than one third of the height of the cup pattern. If the fall continues further, then the retreat is developing into a trend reversal.
The entry signal is when the price moves above the upper trend line that forms the upper edge of the handle pattern. The value of the price projection is the same, but because it usually starts from a lower level, it results in a slightly lower price target when compared with the cup pattern price target.
With the Shanghai Index pattern, the breakout above the handle develops at 3,000. This is also the value of the upper edge of the cup pattern, so the price projection target remains unchanged at 3,400.
The middle trend line is an important feature on the Shanghai Index chart. Starting in August, the trend line has acted as a support level and also as a resistance level. The market has oscillated around the value of the trend line. From August, the line has been most important as a resistance level. The breakouts above the line have not been very strong. The current breakout above this line is also not strong and this suggests the trend line is acting as a significant support and resistance level.
This behaviour suggests there will be a continuation of the oscillation behaviour, where the index swings above and below the value of trend line 1. This shows good uptrend strength but is a difficult market to manage with good stop-loss conditions. It is very difficult to use a trend line to define the nature of the developing uptrend. The general direction of the trend is clear.
The breakout above 3,000 and the move towards 3,400 will include significant rally and retreat behaviours. These swings could carry the index 100 points below or above the value of the uptrend line and still remain consistent with a continuation of the uptrend. Traders need to decide how they will manage risk in this environment.
It is important to note that the trend swing points in the Shanghai Index are not related to the announcement of stimulus packages or to announcements at the G20 or Apec about the intention to keep stimulus packages going. This cup-and-handle pattern development reflects domestic economic development in China. The redeveloping uptrend will be given stronger foundations from recent G20 and Apec announcements, but these are not the primary drivers of this market sentiment.
Post a Comment