The Shanghai Composite index's breakout move above its long -term resistance near 3,400 signaled a bullish uptrend.
This is part of a longer- term up trend breakout, with a target of 3,800. The longer term upside target is 4,200 but expect consolidation behavior near 3,800.
The breakout is a logical development of the chart pattern and the structure of the Shanghai Index. The Shanghai index breakout from the equilateral triangle pattern is bullish and had a long- term upside target near 3,600. Now this target has been achieved, the market will move towards the longer term historical resistance level.
This 3,400 area has two resistance features and overcoming these confirms the bullish nature of the breakout.
The first feature is the historical resistance level near 3,400. This is a long-term support and resistance level that forms at the upper edge of the long-term trading band area.
The second resistance feature is the upper edge of the long-term Guppy Multiple Moving Average (GMMA) indicator. The current value is near 3,440.
The GMMA relationships suggest there is a strong probability that the market will continue to move upwards, with a new rally towards 3,800. This is shown by the developing compression in the long-term GMMA and also the way the long -term GMMA is turning upwards. This underlines the bullish condition of the move.
The short-term GMMA group of averages is developing crossover behaviors, so there is a strong probability it will move above the long-term group of averages and further confirm a bullish breakout.
The breakout development from 3,100 to 3,800 will not be smooth; there will be rally and retreat behavior. Investors should watch for the further development of compression in the long-term GMMA group of averages. Compression will show that selling pressure is weakening and buyers are moving in.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders, available at www.guppytraders.com.. He is a regular guest on CNBCAsia Squawk Box and a speaker at trading conferences in China, Asia, Australia and Europe.