China: Support Test on Shanghai Index

The Shanghai Index continues to retreat strongly after the very rapid breakout above resistance near 2300. There was a high probability this retreat would develop. There was also a high probability the new up trend line would not provide strong support. This up trend line starts with the low of January 13. It was tested several times around February 20. Recently trend lines have not been reliable so this was a low probability support area. This also suggests that trend line analysis will continue to be unreliable in many stocks.

This strong retreat from 2402 has confirmed the position and importance of fan trend line 6. The fan trend line pattern is a long term market reversal pattern and usually has between 5 and 6 fan trend lines. Each fan trend line acts first as a resistance level and then as a support level.

Fan trend line 6 will now act as a resistance level. An index rebound from support and a move above fan trend line 6 will confirm the beginning of a new long term uptrend. Fan trend line 6 is the final fan trend line in this pattern and confirms the market is developing a new long term uptrend.

The developing pattern of support established the foundation for the up trend continuation. The most significant support area is the old resistance level between 2000 and 2100. This is now a very important long term support area. Strong support in this area has the potential to develop a strong rebound and successful test of fan trend line 6. The rebound from this area could develop very strongly and move quickly above the resistance level created by fan trend line 6. These are not Gann fan lines.

The Guppy Multiple Moving Average (GMMA) relationships show good long term support for the trend. The short term GMMA has compressed and turned down. The long term GMMA continues to move upwards and is showing little evidence of compression. This suggests investors are buyers in this market. They see the index retreat as a buying opportunity. Investors are developing confidence in the market.

The short term GMMA could dip into the long term GMMA as the index tests the 2000-2100 support level. The GMMA relationships show developing trend strength. A successful test of the long term GMMA will confirm the trend breakout and continuation. The GMMA relationship shows there is a low probability the market could fall below support at 2000.

Failure to move above 2300 before the beginning of March shows the trend continuation will be slower and more difficult because the index must rise above resistance from fan trend line 6 and also resistance at 2300.



To read more articles and commentaries from Daryl Guppy, click HERE

****

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.

Come and visit Daryl Guppy at ATIC Kuala Lumpur on the 14th and 15th of March 2009