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The charts say Shanghai stocks are ready for a strong uptrend breakout

  • A double bottom breakout pattern has been spotted for the Shanghai index
  • Bullish momentum is building into a new uptrend
Investors talk at a stock exchange hall on February 3, 2017 in Hangzhou, Zhejiang Province of China.
VCG | Getty Images
Investors talk at a stock exchange hall on February 3, 2017 in Hangzhou, Zhejiang Province of China.

The double bottom breakout pattern in the Shanghai Index is developing strongly.

The breakout closed above the value of the resistance level near 3,130. This is bullish. The breakout rally has also tested the upper edge of the long term group of moving averages in the Guppy Multiple Moving average Indicator. This rally is the beginning of a change in the direction of the trend from a downtrend to a new uptrend.

The pattern is also sometimes called a W pattern. The key indication of pattern success is when the second rally – the right side of the W – moved above the middle high of the W. This has developed with a move above 3,110 to a high of 3,143 on May 31.

The retreat from 3,143 was temporary and the rally has tested the 3,143 level again with a strong rally on June 7.

The upside target for the W pattern is near 3,200.

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.