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China stocks consolidating, but uptrend still strong

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The Shanghai composite is among Asia's worst-performing stock indexes in the new year, making 2014's stellar performance seem like the stuff of distant memory, but charts suggest strong support for a continuation of the uptrend.

Chinese stocks were among last year's best performers, with the Shanghai composite rising over 50 percent. But the tide has turned amid slowing growth in the world's largest economy and regulatory concerns. The index is down around 3 percent year-to-date and charts suggest a significant trend consolidation is developing.

The Shanghai Index has developed a new resistance level near 3400, above the longer-term historical resistance near 3300. This means the new trend consolidation band extends from support near 3000 to the new resistance level near 3400. The important feature for the market is the bullish sideways consolidation.

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A strong breakout above 3400 has several targets. The first is calculated from the consolidation band between 3000 and 3300, giving an upside target near 3600. The second is calculated from the width of the consolidation band between 3000 and 3400. Calculated from a breakout from the 3400 level, this gives an upside target near 3800.

These upside targets are compared with the long-term resistance levels calculated from the monthly chart. The market has long-term historical resistance near 3750. This is the first target level for a breakout above 3400.

The market is in a bullish consolidation phase. A 10 percent retracement from the new resistance level near 3400 gives a target level of 3060. A fall of less than 10 percent would be a technical correction in the trend, while a fall of over 10 percent would signal a change in the trend. There is strong support near 3000, so the market may dip temporarily below 3060 to test the lower level of the consolidation band.

The behavior of the long-term group of averages in the Guppy Multiple Moving Average indicator (in red) confirms underlying trend strength. The group continues to maintain a wide separation, indicating very strong investor buying support for the uptrend.

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.