CHINA STOCK MARKET: TRADING BAND CONSOLIDATION

The saucer pattern in the Shanghai Index has failed but the market continues to develop trading breakout behaviour. The market behaviour has confirmed the development of a sideways trading pattern. This is a long term consolidation pattern. The bottom of the pattern is defined by a narrow trading band between 1685 and 1750. This is described as a support area or support region. Currently the upper edge of this support area is providing good support.

The upper edge of this sideways pattern is defined by a second narrow trading band between 2000 and 2100. This is a resistance area or resistance region. These boundaries provide the upper and lower levels on index trading activity as the market continues in the sideways consolidation pattern.

The behaviour feature of this market condition is the development of short term rallies which move quickly upwards to test the resistance area. These rallies are followed by rapid price falls that test the support area. These fast rallies and rapid retreats create difficult trading conditions.
The sideways consolidation pattern is a necessary stage in development before a new long term up trend can develop.

A successful breakout above the resistance area from 2000 to 2100 will find the next resistance level near 2300. There is a high probability the market will fall before the Spring Festival holiday. There is also a strong probability the market will rise after the Spring Festival holiday. A good rally after Spring Festival will move above resistance between 2000 and 2100. A strong rally will test the resistance level near 2300.

The market also continue to show the pattern of fan trend lines. The position of fan trend line 1, 2, 3 and 4 have been confirmed. The recent index retreat has confirmed the position of fan trend line 5. The 5 fan trend lines start from the high point on 2008, January 15. The recent rally high point on 2008 December 22 confirms the position for fan trend line 5. In the recent past fan trend line 5 was a resistance trend line. The recent move above the value of fan trend line 5 is a continuation of the fan trend line pattern of behaviour. Now trend line 5 acts as a support trend line.



The pattern of fan trend lines will continue to develop with fan trend line 6, and possibly a fan trend line 7. The position of fan trend line 6 cannot be confirmed there is a stronger breakout above the level of fan trend line 5.

There is a high probability the market will continue with rally and retreat behaviour inside a long term trend consolidation pattern.

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Daryl Guppy, well-known international financial technical analysis expert. Appears regularly on CNBCAsia and is known as "The Chart Man". He is an equity and derivatives trader and author of books including Share Trading, Trend Trading and The 36 Strategies of The Chinese For Financial Traders. He has developed several leading technical indicators used by investors in many markets. His weekly analysis newsletters get favorable comment in Asia and Australia.