The first resistance feature on the Shanghai Index is the lower edge of the long-term Guppy Multiple Moving Average indicator.. The value is around 3,120. This resistance feature has been broken with the new rally and close near 3,140.
The second resistance feature is the long term resistance near 3,130. This level was penetrated on May 31, but the index closed below the level. The level was tested again on June 7 and the index closed above this level. This is a successful breakout above resistance.
The third resistance feature is the upper edge of the long-term GMMA near 3,145. Investors watch for proof the index can move above this level and stay above this level. This situation will confirm a new uptrend is developing.
The classic GMMA pattern of test, retest and breakout has developed quickly. The classic pattern consists of a rally to resistance – May 31 - followed by a retreat June 5 - and a retest rally that moves above resistance – June 7. This is usually followed by another retreat and a third retest that uses the upper area of the long-term GMMA as a support level.
The new index rally form the upper edge of the long-term GMMA carries the index above the resistance level and develops into a new long-term uptrend. This is the situation investors are waiting for.
A sustainable trend change requires these features.
- Compression in the short term has developed.
- Compression and crossover in the short-term group of moving averages and a move in an upwards direction. This is developing.
- Compression in the long-term GMMA. Traders wait for this development.,
- A sustained move above resistance near 3,130. Traders wait for this development.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders, which can be found at www.guppytraders.com. He is a regular guest on CNBC Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe. He is a special consultant to AxiCorp.