SHANGHAI COMPOSITE INDEX - BREAKOUT PATTERN SETS UPSIDE TARGET NEAR 2,600

The Shanghai Index has developed a very strong rally breakout from the resistance area between 2000 and 2100. There is a high probability this rally will retreat from the resistance level near 2300. The market has closed above 2300 on February 13, Friday, but a retreat may develop from this area in the next several days. This rally and retreat behaviour is the normal behaviour for a long term market trend breakout.

The breakout pattern sets upside targets near 2600 and downside targets near 2000. We start with the downside targets for the index because it is important to always remember risk. There are three features to examine.

• The first feature is the up trend line. This line starts with the low of January 13. The second point for the new up trend line is created on February 2. The value of this trend line is currently near 2120. The value of the up trend line on Friday February 27 will be near 2300. The up trend line acts as a support level. Recently trend lines have not been reliable so it will be very bullish if the index successfully uses this trend line as a support level.

• The second feature is the old resistance level between 2000 and 2100. This will become a new support area. The retreat could fall below the up trend line and test and retest this support this area. If this pattern appears then it suggests the market will develop a another consolidation trading band between 2000 and near the 2300 area.

• The third feature is the Guppy Multiple Moving Average (GMMA) relationships. The long term GMMA has turned upwards but it is still compressed. This indicates the up trend remains weak.



Next we look at the upside targets for a continuation of this market breakout activity. These targets are used when there is a successful breakout above the resistance level near 2300.

There are four features.

• The first feature is the resistance level at 2300. This will act as a new support level and the market should test and retest this level. A successful retest shows trend strength.

• The second feature is the new uptrend line. This up trend line can provide continued rising support for the new trend. If this line develops into a reliable line then trend line analysis can be applied to many other securities.

• The third feature is the resistance band between 2500 and 2600. The resistance at 2600 has been a strong resistance and support level in history so it will become a strong barrier to a continuation of the market rise.

• The fourth feature is the GMMA. A good developing separation in the long term GMMA will indicate investors have become strong buyers and this support the rising trend strength.

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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.