Chinese stocks stormed higher in recent months on the back of stronger economic data, easy monetary conditions and supportive policies from Beijing, recently touching an over one-year high, but charts indicate they may face a period of consolidation.
The Shanghai Index has developed a powerful rally that reached the longer-term targets near 2330 that we set several weeks ago. The pattern is very bullish; this is part of a long-term fan pattern trend-reversal breakout similar to the pattern in 2006. The typhoon flag pattern has been confirmed; the upper edge of the typhoon flag provides the first support level for a retreat from the resistance level upside target near 2330.
Current index activity is contained between the long-term resistance level near 2330 and the value of the upper edge of the typhoon flag pattern near 2278. There is a high probability the Shanghai index will retreat from resistance and consolidate between 2278 and 2330. This consolidation activity has the characteristics of an up-sloping triangle pattern. This is a bullish chart pattern.