Charts: China stocks may form new long-term uptrend

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Worries about slowing economic growth have undercut the momentum that saw China stocks rise over 50 percent last year, but charts suggest that a new long-term uptrend may be at hand.

China's Shanghai stock index posted stellar gains in 2014, outperforming its regional peers amid strong fundamentals and solid valuations. Many investors expected the positive momentum to carry over into the new year, but concerns about the economy undercut that momentum after China posted its lowest annual growth figure in 24 years.

The Shanghai composite is up just over 3 percent year to date after posting a 10 percent technical correction between late January and early February. But charts suggest upward momentum may return amid signs of a rebound.

The 10 percent trend correction created a broad consolidation band between 3060 and 3400, with key resistance levels near 3300 and 3400. The correction behavior has developed inside a seven-week sideways consolidation band that includes frequent strong rally and retreat behavior.

The consolidation band between 3060 and 3400 creates a good foundation for a breakout and continuation of the uptrend. Investors who took profits near 3400 are now returning to the market, buying into the rally from 3060 in anticipation of a continuation of the uptrend. A successful breakout above resistance near 3400 will see an increase in investor buying activity.

Resistance near 3400 is not a triple top pattern because the touch points are too close together. A triple top pattern normally takes 10 to 14 weeks to develop.

The wide separation in the long-term group of averages in the Guppy Multiple Moving Average (GMMA) indicator (in red) confirms strong investor support for the trend continuation. The long-term GMMA developed slight compression but has turned upwards and is expanding. This is bullish behavior.

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The short-term GMMA (in blue) compressed and turned up with the rally rebound activity from the upper edges of the long-term GMMA. This is also bullish behavior.

The market remains in a bullish consolidation phase, but good rally strength can develop into a breakout above 3400 and create new long-term uptrend. The first target for a breakout above 3400 is calculated from the consolidation band between 3000 and 3300. This gives an upside target near 3600. The second upside target is calculated from the width of the consolidation band between 3000 and 3400. This is calculated from a breakout from the 3400 level and gives an upside target near 3800.

These upside targets are compared with the long-term resistance levels calculated from the monthly chart of the Shanghai Index. The market has long-term historical resistance near 3750. This is the most important level, so 3750 is the possible target for a breakout above 3400.

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