PBOC rate cut turbo charges Shanghai uptrend: charts

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An interest rate cut from the People's Bank of China on Friday spurred a global stock rally and charts suggest the move will further boost an already-strong uptrend in the Shanghai Composite index.

The People's Bank of China cut the one-year benchmark lending rate by 40 basis points to 5.6 percent on Friday and lowered the one-year benchmark deposit rate by 25 basis points to 2.75 percent in an effort to support the slowing economy.

On the weekly chart, the Shanghai Composite recently pulled back to trade between trend lines C and D and then rallied above trend line D. The strong rally above trend line D shows exceptional trend strength.

The uptrend breakout started as a typhoon flag pattern and then developed into a pattern of trading channels defined by up-sloping trend lines. The width of the lower trading channel between trend lines A and B was measured and projected upwards to set the location of trend line C. This same method was applied to set the location of trend line D. The distance between trend lines A and C was measured and projected above the value of trend line C, creating a third and higher trading channel, trend line D.

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Trend line D is now a support level. The move above the value of trend line D was caused by the announcement of Hong Kong-Shanghai stock connect. The door for direct trading of Shanghai stocks is open, which is driving bullish sentiment. Our thrice weekly New Red K Line examines trading opportunities.

The trend's next upside target is calculated using historical resistance levels. The weekly chart shows a historical resistance band between 2450 and 2550. The 2450 level acted as resistance in March and May 2012, and February 2013. The market's move above 2450 is very bullish; investors watch for consolidation to develop between 2450 and 2550.

The uptrend's strength is confirmed by the Guppy Multiple Moving Average (GMMA) indicator. The GMMA indicator uses two groups of moving averages: the short-term group shows the activity of traders; the long-term group shows the activity of investors. Continued good separation in the long-term GMMA (in red) shows strong investor support for the uptrend, an indication the trend is strong and stable.

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The Shanghai Index does not have any end-of-uptrend chart behavior patterns. The chart does not show a head and shoulder pattern, nor does it show a rounding top pattern, steeple top pattern or parabolic trend pattern.

Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders – www.guppytraders.com. He is a regular guest on CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.