Shanghai Composite uptrend shows signs of strength

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An investor watches the electronic board at a stock exchange hall in Huaibei, China.

The Shanghai Composite index has developed a strong rebound from the upper edge of the long-term Guppy Multiple Moving Average, or GMMA, (in red on the chart).

The rebound rally shows that investors are confident about the strength of the index's trend. The market has broken resistance near 2210 – a significant historical resistance level. A sustained breakout above 2210 is very bullish and sets the next upside target near 2330.

This is a classic GMMA trend test-and-continuation pattern. This develops when the index falls towards the upper edge of long-term GMMA, the long-term GMMA acts as a support level and the index then rebounds, continuing the uptrend.

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The position of uptrend line B is adjusted to include this retreat-and-rally rebound pattern. The new uptrend line has three anchor points, and is now near the upper edge of the long-term GMMA.

Key resistance and support is near 2210. A sustained rise above this level has a short-term upside target near 2270 and a longer-term upside target near 2330.

Investors should look for a stable degree of separation between the upper and lower edge of the long-term GMMA. A stable separation confirms trend strength and reliability. When the market fell from 2270 the long-term GMMA did not develop any compression, which confirmed that investors were not sellers. Now the long-term GMMA is showing a small degree of expansion, a sign that investors are buyers.

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The rebound from the upper edge of the long-term GMMA suggests a more stable and sustainable uptrend. The value of the lower edge of the long-term GMMA is above the historical support level near 2130. This provides two support features which increase the probability the index will continue the uptrend.

Investors should watch for a breakout rally above 2210 followed by a retreat and retest of 2210 as a support level. A successful test of 2210 as a support level would be a bullish confirmation of the strength of the uptrend.

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.