The rally in the Shanghai Composite Index paused near 2,290 before falling down and retesting the 2,250 support level and then developed a good rebound rally towards resistance near 2,340. The retreat in the Shanghai index was a consolidation within the environment of a rising trend. It was not a trend correction and it was not a change of trend direction.

The pattern of behavior in the Shanghai index rally suggests a rapid breakout above 2,340 followed by a retreat and a test of 2,340 as a new support level. This is the step pattern behavior.

The current step pattern in the Shanghai index is moving very rapidly. This fast up move is very useful for shorter term trading but traders must use a good stop loss to protect profits. The value of the uptrend line is currently near 2,290. The value of the lower edge of the short term group of averages in the Guppy Multiple Moving Average Indicator is a little lower near 2,260. The lower edge of the short term GMMA will also act as a support level.

The Relative Strength Indicator (RSI) can be used as a measure of overbought or oversold market conditions. The overbought area is when the RSI is above 70. The current RSI reading is near 60. This means the market is moving out of an overbought condition and into a more neutral market condition near 50. This shows the market is not overbought and also not oversold. The RSI indicator values can return to the middle range near 50 and this will show consolidation in the uptrend.

Starting October 2012, the S&P 500 Index has developed a strong and stable uptrend. The uptrend is well defined using the Guppy Multiple Moving Average (GMMA) indicator. This indicator has two groups of averages.

The long term group captures the thinking of investors. Wide separation shows strong investor support for the trend. The short term group shows the thinking of traders. In the S&P index they are not quite as confident as investors.

The S&P shows rally and retreat behavior with the lower edge of the long term GMMA tested in June 2012 and again in November. For each test investors have come into the market as buyers because they believe the S&P can go higher. This is a bullish result and confirms the strength of the uptrend.

(Read More: US Markets Overview)

The trend behavior does not include any chart patterns which help to set upside targets. However, the long term pattern of support and resistance shows the S&P index moves in wide trading bands.

Each of these bands is around 140 index points wide. The lowest of the support/resistance level is near 1130. The next support/resistance level is near 1270. The current support/resistance level is near 1410. The current rally is a rebound rally from this support/resistance level at 1410. The width of the trading bands provides the next upside target for this uptrend. It is near 1550.

The strength or weakness of the U.S. dollar is influenced by four features. The first feature is the latest round of quantitative easing in the United Sates. The second feature is the inadequate solution to the "fiscal cliff" issue made at the end of December. A solution was achieved but many people believe the solution is only temporary and that it will lead to a U.S. recession. The third feature is the debate about lifting the U.S. debt ceiling. This requires a decision before the end of February. The fourth feature is the potential for more ratings agencies to downgrade the U.S. to double A rating.

These four features contribute to weakness in the U.S. Dollar Index. The index is a basket of currencies comprising the euro, the Japanese yen, the British pound, the Canadian dollar, the Swiss franc and the Swedish krona. The dollar index is used as a measure of the strength or weakness of the U.S. dollar.

(Read More: Picture This: The dollar at 100 Yen)

There are three significant features on the weekly dollar index chart. The first feature is the uptrend line that started in September 2011. One year later, in September 2012, the dollar index fell below this uptrend line. The weekly close below this uptrend line was the first signal of a significant change in the trend direction. This showed weakness in the uptrend, but it did not help traders to set long term downside targets.

Japan's benchmark stock index the Nikkei has had a great past one month rising more than 12 percent in the run up to the Japanese polls on December 16. On Monday, a day after the opposition Liberal Democratic Party won a comprehensive victory, the index hit an eight-and-a-half month high.

But the index has two resistance levels that cap the current rally breakout. The first resistance level is near 10,200. This is a shorter term resistance level that developed from the two rally peaks in July 2011 and March 2012.

The longer-term resistance is created by the peak high in February 2011. This high, and the low in March 2009 have created a very wide trading band. The Nikkei has been trapped within the confines of this band for three years. Recently, starting in July 2011, the activity has been defined by a narrow inside band with support near 8,300 and resistance near 10,200.

The current rally has a high probability of retreating from resistance near 10,200. The downside support level is near 9,000.

The U.S. Federal Open Market Committee (FOMC) meeting this week will drive the U.S. dollar movements. The direction of the movement is not yet clear in the chart analysis. The potential limits for the reactions are more clearly defined.

This highlights some important issues regrading the use of charts in analysis. They are first and foremost a tool for identifying the balance of probability of one reaction over another. Sometimes the balance is clearly tipped in one direction. This is shown with clear chart reversal patterns such as a head and shoulder, a rounding top, or the break below a key support level or trend line.

There are no well-established chart patterns on the U.S. Dollar Index, however there are well defined support and resistance levels.

The index is a basket of currencies comprising the euro, yen, British pound, Canadian dollar, Swiss Franc and Swedish Krona. The index is used as a measure of the strength or weakness of the U.S. dollar.

The second use of chart analysis is to identify trip points where a market moves into a new phase. This may be a trend line. A close below the trend line signals the end of the uptrend and the beginning of a new downtrend. With the dollar index these trip points are set by the historical support and resistance levels. A move above or below these levels confirms a significant change in the trending behavior. Traders use this as a signal to take new positions.

Gold hits the headlines but the real action is in its sister metal and one time king of the currency world. Silver gives traders leveraged access to gold. In simple terms, it's cheaper to buy contracts, you get more bang for your buck, and the returns on capital are greater. This is an alchemist's opportunity to turn silver into real gold.

Silver has several characteristics which help to understand the potential for future price behavior. The first characteristic is the fast rise in August and September this year. This was a rapid uptrend breakout moving from $28 per ounce to $35. This gives a 25 percent return. For the same time, gold gives a 10 percent return. Silver moves more rapidly, and the profit is larger.

The second characteristic is the resistance level near $35. This has been a strong support and resistance level. It was a support level in May and July 2011. It was a resistance level in November 2011 and February 2012. A successful breakout above $35 has an upside target near $43. A move above $43 has the next upside target near $50.

The third characteristic is the clearly defined trend changes. The trend are easily defined using a trend line. The fast uptrend was defined by trend line A. The downtrend defined by trend line B. The current uptrend is defined by trend line C. A move above or below the trend line gives a reliable signal of a change in the trend. This allows traders to establish reliable entry points and to set effective stop loss points. The trend behavior is more clear than gold.

Trading channels are useful to traders and investors as they show us how price is likely to continue to develop. We are given a defined range of volatility in which price can rally and retreat while still moving in the direction of the trading channel. This presents traders in particular with multiple rebound and rally trading opportunities on both the long and the short side.

An additional advantage of the trading channel is that the price projection of a breakout continues to rise as price rises. Gold continues to develop using the upward sloping channel as the general definition of the secular trend. We can see price slide down Trend line C through both the top and bottom of trading channel B.

A month ago we identified the development of a long term fan reversal pattern with the dollar/yen chart. The compression of activity between support near 78 and the value of downtrend line D increased the probability of a fast breakout and this has developed.

This week we update the notes of the progress of this breakout. The fan pattern is a long term trend reversal or breakout pattern. It's best seen on a weekly chart. The fan pattern with the dollar/yen started with the peak high at 110 yen in 2008 August. This high point is the anchor point for the four fan trend lines. It is a long term pattern.

Three weeks ago, I told CNBC Asia's "Squawk Box," that the Dow Jones Industrial Average suggested a Barack Obama victory. President Obama is not popular with many investors. They are unhappy with proposed tax changes and other aspects of his policy. As the prospect of an Obama victory increased we saw the Dow selloff.

The Index greeted Obama's victory with a more than 2 percent plunge on November 7.

The critical fall was the move below the value of trend line A and the fall below the support resistance level near 13,200.

Newton watched an apple and asked how far it could fall. When investors watch Apple’s share price they ask a similar question because the answer helps tell them when the upward momentum will stop.

The key question for Apple is not how far it can rise. The key question is how far Apple stock can fall before the fall becomes a signal of a change in trend.

A fall, or retreat, that is not a change in trend is a buying opportunity. A fall that is significant enough to signal a change in trend is a sell signal to lock in profits.

The size or daily range of the fall provides little indication of the threat to the trend. A large range on a day with increased distance between the high and the low is not an end of trend signal.