The Rally in China Stocks Is Here to Stay: Chartist

Investors watch the electronic board at a stock exchange hall in Huaibei, China.
ChinaFotoPress | Getty Images
Investors watch the electronic board at a stock exchange hall in Huaibei, China.

The rally in the Shanghai Composite Index paused near 2,290 before falling down and retesting the 2,250 support level and then developed a good rebound rally towards resistance near 2,340. The retreat in the Shanghai index was a consolidation within the environment of a rising trend. It was not a trend correction and it was not a change of trend direction.

The pattern of behavior in the Shanghai index rally suggests a rapid breakout above 2,340 followed by a retreat and a test of 2,340 as a new support level. This is the step pattern behavior.

The current step pattern in the Shanghai index is moving very rapidly. This fast up move is very useful for shorter term trading but traders must use a good stop loss to protect profits. The value of the uptrend line is currently near 2,290. The value of the lower edge of the short term group of averages in the Guppy Multiple Moving Average Indicator is a little lower near 2,260. The lower edge of the short term GMMA will also act as a support level.

The Relative Strength Indicator (RSI) can be used as a measure of overbought or oversold market conditions. The overbought area is when the RSI is above 70. The current RSI reading is near 60. This means the market is moving out of an overbought condition and into a more neutral market condition near 50. This shows the market is not overbought and also not oversold. The RSI indicator values can return to the middle range near 50 and this will show consolidation in the uptrend.

The RSI indicator is showing an RSI divergence pattern and this suggests the current uptrend strength is developing some weakness. This weakness means the uptrend loses momentum and develops a sideways consolidation pattern.

The short term GMMA showing trader behavior has moved very quickly above the long term GMMA group of averages and continues to show good separation. This shows strong trader support for the new uptrend.

The long term GMMA has compressed and turned upwards and developed a wide separation. The width of this separation continues to expand and this shows increasing and strong investors support for the new uptrend. This is a very strong long term uptrend so any market retreat has a high probability of rebounding from the support created by the long term GMMA. The Shanghai index could fall to support near 2,200 and continue in a long term uptrend condition.

Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders – . He is a regular guest on CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.

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