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The Shanghai Composite appears to be heading for a downtrend

  • The Shanghai Composite uptrend has lost momentum
  • Support on the index could be tested between 3,260 and 3,290

The Shanghai Composite index pullback is a signal of a major interruption to the uptrend in the key market measure in China. This behavior shows the failure of three important support features.

This suggests the uptrend had lost momentum. At best, this could develop into a period of consolidation prior to the development of a uptrend continuation. At worst, this could signal the collapse of the uptrend and a test of support between 3,260 and 3,290.

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The uptrend was defined with a straight edge trend line. This trend line has provided a significant support feature and a potential rally rebound point. This is the first time since 2017 May that the index has closed below the trend line.

This is a significant trend break signal.

The second support failure is the close below the lower edge of the long-term Guppy Multiple Moving Average indicator. This is an early warning sign of trend weakness. Further falls in the index will develop rapid compression in the long-term GMMA, which shows investors quickly turning into sellers.

The pullback broke completely through the GMMA. This is a close well below the lower edge of the long-term GMMA. The close is significant because it shows there is strong selling pressure.

Closes at, or near, the low of the day are very bearish. The close well below the lower edge of the long-term GMMA is particularly bearish. It is usually associated with a change in the trend.

The third support failure is the close below the long-term support and resistance level near 3,360. This has been a significant long-term support level for the Shanghai index.

The substantial close below this level is very bearish. This is different to the activity in September where the index moved below this level for six days. In September the index moved down to test the upper level of the long-term GMMA as a support feature.

In the current situation, the index has smashed through the lower edge of the long term GMMA and the 3,360 support level. Any rebound is most probably only a temporary rally.

These are all features of an early warning of trend weakness.

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.