GOOD NEWS.... at least for the China equity market

The Shanghai Index chart has four features which suggest developing good news. The chart suggests the market decline may soon end. These are the four features.

The first feature is the strength of the second fan line. The fan pattern shows a long term trend reversal. It takes many months to develop. The decline in recent weeks has used the second fan line as a support level. This is important because it shows the market does not have panic selling. If there was panic selling then the market will fall below the support level shown by the second fan line. In many world markets the market has fallen below important support lines and trend lines.

The second feature is the head and shoulder pattern. The first downside target for this pattern is near 2000. The second downside target for this pattern is near 1750. These head and shoulder patterns have been very reliable in many international markets. When the market achieves these downside targets then the market moves into a consolidation pattern. This shows the bear market is weakening. Traders watch for good support to develop near 1750 to 2000.

The third feature is the high probability of a consolidation pattern developing between 1750 and 2000. This consolidation signals the end of the bear market and the development of strength for a new bull market. This consolidation period is when many investors return to the market and start to buy.

The consolidation pattern can include a sideways consolidation pattern where the market moves between horizontal support and resistance levels. Another consolidation pattern is a longer term saucer pattern. This usually takes several months to develop. A third type of consolidation pattern is a “W” pattern. This starts with a very strong rally from support. Then the rally fails, and falls back to the support level. This is quickly followed by another rally and this is the beginning of a longer term uptrend.

The fourth feature is the potential to develop good rallies in the index as it moves towards support between 1750 and 2000. This is a common feature in this consolidation period. These rallies provide good trading opportunities.

These four features will develop fully in the next several weeks. The signal for the start of the consolidation period may include a bear market selling climax. This is a sudden market collapse with exceptionally strong selling volume. This panic selling behaviour pattern signals the end of the main section of the bear market. Traders use extreme caution in the current market condition.

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Article contributed by Private Trader, Market Expert, Trading Coach and Best-Selling Author Mr. Daryl Guppy. For more articles and commentaries from Daryl Guppy, click HERE