The spring festival holiday delivers a week of no trading in China. Holidays always make people feel differently and this is reflected in their trading behaviour. Periods leading up to, or following, major holidays often show repeated statistical relationships. For some traders, this offers an opportunity to develop specific holiday period trading strategies. For others, the volatility surrounding holidays is discounted. They adjust trailing stops to take this into account because they know the impact is temporary. While past performance is not a perfect guide to the future, there are certain statistical relationships that develop.
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Testing Shanghai support for Spring Festival
Daryl Guppy
06 February 2010
The spring festival holiday delivers a week of no trading in China. Holidays always make people feel differently and this is reflected in their trading behaviour. Periods leading up to, or following, major holidays often show repeated statistical relationships. For some traders, this offers an opportunity to develop specific holiday period trading strategies. For others, the volatility surrounding holidays is discounted. They adjust trailing stops to take this into account because they know the impact is temporary. While past performance is not a perfect guide to the future, there are certain statistical relationships that develop.
The month prior to the Spring Festival has seen a fall in the Shanghai market. This is unusual because the market has a 25% probability of rising in the month leading up to the festival. This momentum usually carries through (with a 75% probability) in the month following the Spring Festival. A down month prior to the holiday is followed by a down month in 8.3% of years. This does not mean there is a 91.7% probability of a rise as the market has moved sideways in some years.
There is a 75% probability the market will rise in the week prior to the holiday and this momentum continues in the week after the holiday break. This combination of behaviour suggests there is a higher probability the market will develop a rebound from the 2,900 support area, with the potential for this to continue into February and early March.
These statistical relationships should be treated with caution, but they do provide an indication of market behaviour during the holiday period.
There are two conflicting features on the Shanghai Index chart. The first is the support and resistance areas. These define a broad trading band. The second feature is the confirmation of a down-sloping trend channel. This is defined by two parallel trend lines but it cannot be defined exactly. The market is developing and it is difficult to pick the strongest influence on market activity.
A trading band uses horizontal support and resistance levels. This is a sideways market. A trading channel uses parallel-sloping trend lines. This is a trending market. We look at both features.
Traders who follow the trend channel use this analysis. The upper channel trend line starts with the November 2009 high. It uses the December 2009 high and the cluster of high points in January 2010. The position of this trend line ignores the high point on Jan 10 at 3,306.
The parallel lower trend line starts with the November 2009 low and uses the December 2009 low as the second point for the trend line. The current price activity low near 2,900 is below the lower trend line. This is a trading channel, so, if the slope of the lower trend line is adjusted, then the slope of the upper trend line is also adjusted.
The recent index activity makes it difficult to trace the position of the trend lines, so, they include all the important highs and lows. The downtrend channel analysis helps to develop a broad idea of market behaviour. It shows there is significant bearish pressure in the market.
Traders who follow the trade band analysis look at the support and resistance features. The resistance feature is the historical resistance area between 3,300 and 3,400. The market has been reacting away from this resistance level in November 2009, and again in December 2009. The resistance area has been very strong.
There is good historical support between 2,910 and 3,000. This forms the lower edge of a trading band. The market retreat has used this support area as a rebound point. Traders who follow the trade band analysis see this rebound as a bullish feature in the market. In this analysis, the market will continue to move between the upper and lower edges of the trading band between 2,910 and 3,400. This market condition has many rally-trading opportunities but there is also strong resistance from the value of the long-term trend line.
Confirmation of the trading band analysis shows a market where upward momentum has paused. It shows a market where rally and retreat behaviour will become the main trading feature. Confirmation of the trading channel analysis shows a market where there is a strong change in the direction of the trend. The width of the down-sloping trend channel also provides rally-trading opportunities. (See Chart.)
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