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Shanghai stocks shake downtrend; three paths possible

Investors looking at stock prices on screens in a securities exchange in Shanghai.
Peter Parks | AFP | Getty Images
Investors looking at stock prices on screens in a securities exchange in Shanghai.

As worries about a potential slowdown in Chinese economic growth wan, the Shanghai Composite Index has shaken the downtrend that started in December 2013. But a successful breakout pattern and new uptrend are yet to emerge – recent chart activity indicates three possible patterns lie ahead for mainland shares.

The Shanghai Composite has a strong support level near 1980, which has provided the foundation for a double bottom pattern. The first test near this support level was at point A on the chart, with the second test at point B.

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While it's too early to tell how the index's future activity may develop there are three possible development patterns.

The first is a slow continuation of the double-bottom rebound W pattern. The first upside target is near 2177, with a long-term upside target near 2310. The recent weakness in the rally rebound from area B suggests the W pattern breakout may be slow to develop.

The second is the completion of a triple-bottom pattern. This pattern would develop if the index retests support near 1980 and then develops a third strong rebound rally. The first target for this triple bottom is near 2150. The triple bottom pattern does not develop into a clear long-term uptrend breakout, so investors should watch carefully for signs of uptrend continuation when the first breakout target is achieved.

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The third is a sideways consolidation pattern, which would become an L-shaped trend change pattern. The lower edge of the L-shaped pattern is near support near 1980, while the upper edge is near resistance at 2070. If this L-shaped pattern develops the index would move sideways for several months with rally and retreat activity between 1980 and 2070.

The L-shaped pattern is a long-term pattern that often takes several months to fully develop before a new uptrend can develop. A breakout from an L-shaped pattern would have a first upside target near 2170.

Investors should watch the index to confirm the type of consolidation pattern that is developing. Once the consolidation pattern is confirmed then chart analysis can clearly identify the future breakout targets.

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.

  • Daryl Guppy is an independent technical analyst who appears frequently on CNBC Asia.

Asia Economy