The Shanghai Composite Index broke a key support level to open at 2,132 on Tuesday, its lowest level this year. And the key question is whether the index has the ability to successfully test support near 2,140, which was created in December 2011 and January 2012.
This is a critical level. Failure of support at 2,140 confirms the continuing strength of the downtrend and sets a new downside target near 2,000.
Although we talk of 2,140 as the support level the activity of the market is not so exact. The index may move slightly above and below this level as the support level is tested and confirmed.
What are the features that show a failure of support near 2,140?
The first feature that shows a failure of support is a close on a daily candle below 2,140.
The second feature that confirms a failure of support is when the close on a weekly candle is below 2,140. The Shanghai index downtrend is very strong and is defined by a down sloping trend channel defined by trend line B and trend line C. Trend line C is acting as a support line. Trend line B is acting as a resistance line. In the short term the index has rally and retreat behavior between trend line C and trend line B.
The long term group of averages in the Guppy Multiple Moving Averagesindicator are widely separated confirming the strength of the downtrend. The value of the lower edge of the long term GMMA is a little below the value of the downtrend line B.
The Shanghai index is moving in a very long term and very wide consolidation band. The upper edge of the wide consolidation range is shown with resistance line 1 near 2,460. The lower edge of the wide consolidation range is shown with support line 2 near 2,140.
A move below the lower edge of this very wide consolidation band is very bearish. Starting from December 2011 the Shanghai index is moving above and below a narrow middle trading band area. The upper edge of this middle trading band is line 3 near 2,310. The lower edge of the middle trading band is line 4 near 2,260.
A bullish result develops if the support from line 2 is successful in stopping the downtrend momentum. In this situation the market moves sideways near the 2,140 support level.
Failure of the 2,140 support level means the market can fall towards the next support level near 2,000 and use trend line C as the support level. This is a bearish result.
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 CNBC's Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.
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