The double bottom, or W breakout pattern, in the Shanghai index has developed successfully and the rally has paused just below the target level of 3,200. The upside target for the W pattern is near 3,200 and the index is consolidating near this level.
The W pattern is a trend change pattern, so investors expect the index to move higher. The next upside target is calculated using trading band projection methods. The width of the trading band is measured and projected upwards. This sets an upside target near 3,265 which is also a previous resistance level.
These pattern projection targets do not show how the new uptrend will develop. The key guide is the Guppy Multiple Moving Average relationships because this provides a guide to the strength of investor sentiment and the confidence of traders.
The long-term GMMA reflects the thinking of long-term investors, and it has compressed and is turning upwards. This shows that investors are becoming more confident about the future direction of the Shanghai index, so when the index retreats, the investors enter the market to buy. In the future, investors watch for an expansion of the long term GMMA group of averages because this confirms strong investor confidence in the new uptrend.
The Shanghai index has developed a classic GMMA breakout, retreat and rebound rally pattern as the longer term index uptrend develops. The first rally in the first week of June carried the index above the value of the upper edge of the long-term GMMA.
The retreat successfully tested the lower edge of the long-term GMMA as a support level. The recent rebound rally moved above the upper edge of the long-term GMMA and confirmed the development of a longer term uptrend.
The behavior of the short-term GMMA, which reflect the thinking of traders, shows that they're also becoming more confident. The current activity in the short-term GMMA shows wide separation and shows traders are more aggressively buying. A retreat and consolidation is a normal behavior for this type of trend breakout. This will lead to some compression in the short-term GMMA followed by an expansion as traders move into the market to take advantage of temporary lower prices.
In this type of market environment we use the ANTSYSS trade method to extract good returns from the rally and trend developments.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders, which can be found at www.guppytraders.com. He is a regular guest on CNBC Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe. He is a special consultant to AxiCorp.