With gains of more than 70% so far this year, China is the only global market which has showed a true and powerful “V” shaped recovery, epitomizing the return of investor confidence after a dud year in 2008.
I've indicated in an earlier blog that Western markets are increasingly mimicking the behavior of their Shanghai counterparts, with a lag of several months.
Therefore in order get further clues on where global equities are headed, it's worth looking at the China charts for clues.
There are four important features of China market development.
The first feature is that the "cup-and-handle" pattern on the daily chart, which has shown a successful breakout towards the target at 3,400. While the exact chart pattern target was not achieved, the "cup-and-handle" pattern does signal a long-term bullish feature in the market for 2010.
The second feature is the strength of long term support near 3,000. This has been a significant historical support level. There is a high probability that this level will continue as a support area with a rally rebound from near the 3,000 to 3,050 support area.
The third feature is the importance of the long-term trend line 2. When the "cup-and-handle" pattern developed, it looked as if the long-term trend line was not relevant to the new uptrend strength. When the "cup-and-handle" pattern ended, the market has retreated back to the value of the long-term uptrend line.
The current value of this trend line is near 3,000. The value of the long-term trend line will move above 3,000 and this should act as a new support level for a long-term trend rise. The position of the long-term trend line is not exact. This line will be adjusted to include the current Shanghai Index rebound activity.
The fourth feature is the influence of the shorter term trend line 1. There is now a high probability this trend line 1 will act as a resistance level in the rising trend. This is not a strong resistance level. The market may move 100 points above this trend line before a retreat develops. The short term trend line acts as a resistance area.
The market retreat towards 3,000 was not a high probability development after the bullish cup and handle pattern. However the combination of long term up trend and strong support levels suggest there is now a higher probability the long term uptrend will continue.
In short, expect gains in the Chinese markets to continue in 2010, but not without their characteristic volatility. If the charts are right, it could be a good year for global stock investors.
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