Charts: China’s stock market is poised for a rally

Danny Hu | Flickr | Getty Images

The Shanghai Index has developed a powerful rally and has moved above the critical resistance level near 3000. This is a fast and sustained up move that has the characteristics of a new uptrend. The long-term upside target for the Shanghai index is near 3400. The breakout rally is stronger than the breakout above 3000 that developed in March and April.

This is significant because the long-term Guppy Multiple Moving Average (GMMA) indicator has compressed and turned upwards. This shows that investors are developing more confidence that the uptrend is sustainable.

Also the short-term GMMA is well separated and this shows strong support from traders.

The most important feature of the development is the way the short-term GMMA has already moved above the upper edge of the long-term GMMA. This relationship is very bullish.

The breakout above 3000 will be followed by a retreat and a retest of the 3000 level as a support level. The rally and retreat retest is a normal part of the uptrend development. This is a buying opportunity for traders and investors.

The 3000 level is a key historical resistance level. It is very strong so the breakout above this level may take several weeks to develop fully. It is important for the index stay inside the short-term group of GMMA averages. This helps to confirm the developing trend strength. The index could retreat to near 2930 and still remain in a trend breakout condition. A retreat to this 2930 level is a buying opportunity when the rebound develops.

The index fall in January was very rapid. This suggests that there are not any resistance obstacles between 3000 and 3300 so this makes the breakout above 3000 a very bullish breakout. Investors are ready for a fast up move. The next consolidation area is between 3300 and 3400.