Figure 1: Weekly chart of the Shanghai Composite.
For a little perspective, the first chart focuses on the Shanghai Composite from January 1999 to the present. The index established support in the low 1300s with four bounces in the last 5 1/2 years. Three of those bounces occurred in 2002 and 2003. The strong advance from 1307 to 1783 broke above the trendline extending down from 2246 and exceeded the 2003 high (green arrow). However, the index remains locked into a larger trading range bound by 1300 and 1800. It would take a move out of this range for the index to establish a clear and decisive long-term bias.
|The breakout at 1650 failed to hold and the pullback over the last few months carried the index back below 1600. While this may seem bearish, a look at the daily chart shows a sharp advance followed by a sharp correction. What goes up, must come down. But just how far? A correction should retrace anywhere from 38.2% to 61.8% of the prior advance, which are both Fibonacci numbers. In addition, some securities retrace 50% of the prior advance, which is popular among Dow Theorists.|
|Figure 2: Daily chart of the Shanghai Composite.|
|Graphic provided by: MetaStock.|
|Even though the index is trading in the middle of a typical retracement zone, the trend is clearly down as the index remains in a steep falling price channel (magenta lines). Traders should be on guard for a reversal or some firming, but it would take at least a move above the upper trendline and last week's high (1600) to signal even the simplest breakout. Judging from the strength of the latest decline, it may extend to the 62% retracement around 1500 before finding support.|
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