Originally published by guppytraders.com
The Shanghai Index retreat and breakout is a bullish signal for the market. Its bullish because it confirms that the rally from the low of 2691 is part of an emerging consolidation and breakout pattern.
The immediate upside target is the value of the lower edge of the long term group of averages in the Guppy Multiple Moving Average (GMMA) indicator. The second resistance level is the value of the upper edge of the long term GMMA.
Its too early to call for a trend reversal, but the pattern of development suggests a trend reversal is under way.
Investors watch for the development of a series of rebound rallies to confirm that the momentum of the downtrend has slowed. The recent rally and retreat has some of the characteristics of a consolidation pattern. The test of consolidation will be the behavior of the index as it moves towards recent resistance near 2820. The breakout above this level is bullish.
Investors continue to watch for two features to confirm a trend change.
First is the appearance of more up-days where the index rises. The structure of the market changes. The up-days move more easily and have larger daily ranges. This confirms that confidence is slowly returning to the market.
Second is the behavior of the GMMA averages. This indicator captures the inferred behavior of investors and traders. Compression shows agreement about price and value. Agreement does not last for long in the market so this also signals a potential for a trend change..
The short term group of averages have compressed and turned up. This s confirms a return of confidence for traders. The long term group of averages are well separated and this shows investors are still sellers. The downtrend has not ended, but the process of a trend reversal is developing.
The degree of separation between the two groups of averages is slowly narrowing. This is a precondition for a change in the trend direction. These are not signals of a strong or sudden trend reversal. They are signals that the downtrend pressure is reducing.
Aggressive traders are starting to ether the Shanghai market in anticipation of a trend change. Conservative traders will wait for a move into the longer term GMMA.
Daryl Guppy is a leading international financial technical analysis expert and special consultant to Axicorp. Guppy appears regularly on CNBC Asia and is known as "The Chart Man". Disclaimer: Daryl Guppy is not a financial advisor. These notes are for educational purposes only and provide an example of applied technical analysis.