Charting Asia

Shanghai Index Could Rally to 2,760 After Soft Landing: Charts

A weakening China economy is a further weight on global indexes. The current global fall may have been started by the euro zone collapse but many have looked for resilience in the China economy and China demand to help lift other economies. Some counties like Australia have built an entire economic recovery strategy based on assumptions about continued China growth.

The key China question revolves around the ability of the government to manage a soft landing. Although this is seen as evidence of a command economy, and therefore doomed to failure according to some, the policy initiatives are not much different in approach to those used in Europe with government sponsored intervention, and in America, with government sponsored rescue packages.

The Shanghai Indexshows a steady decline towards 2,300. This is a slowly moving downtrend and quite a contrast to the rapid collapses seen in the DOW, the DAX and the FTSE . This slow downtrend confirms a soft landing for China, although this does not preclude a bump or two. The Shanghai Index is developing a triple bottom rebound pattern. The small double bottom, shown as points A and B, lead to a successful rebound. The height of this pattern is approximately 118 index points.

The target for this pattern is calculated by measuring the distance from the lows to the peak of the rally and projecting this value upwards to give a target of 2,548. This target was not achieved because the resistance from the long-term downtrend line was too powerful. The market retreated from the long-term downtrend line.

This retreat shows the long-term downtrend line is a very significant resistance feature. In the future, a close above this downtrend line will be a very powerful trend reversal signal. This is a weekly close seen on a weekly chart.

The strongest support level is near 2,300. The 2,300 level acted as a support level in 2010 July and as resistance and support in 2009 February and March. A fall and rebound from support near 2,300 creates a triple bottom pattern.

Target calculations for a successful triple bottom pattern are calculated using the same method of measuring the height of the central rebound rally.

The third rebound point is somewhere near point C. If support near 2,300 is successful, then the distance to the peak of the most recent rally in November at 2,530 is approximately 230 index points. This value is projected above the peak of the rally at 2,530 and gives a long-term target near 2,760.

The wider the separation between the rebound lows in the double and triple bottom pattern then stronger the pattern rebound. The first double bottom pattern between points A and B developed over 9 days. This suggested a weak breakout pattern. The time between the first point in the triple bottom pattern at point A and the possible third point in the triple bottom pattern at point C is already more than 7 weeks. This makes the triple bottom pattern much stronger and this increases the potential for a stronger downtrend breakout.

The Shanghai Index has the potential to develop a triple bottom reversal pattern within the context of a broad consolidation base. This combination of features suggests a soft landing and a recovery.

Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –. 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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