Figure 1: Weekly chart of the Shanghai Composite.
|Since deflating from above 2200 in Jun-01 to below 1400 in Feb-02, the Shanghai Composite ($SSEC) formed a large trading range over the last two and a half years. As can be expected from volatile securities, exact support and resistance levels are difficult to pinpoint and zones are preferable. The upper resistance zone (1750-1800) extends back to Dec-01 and the lower support zone (1300-1350) extends back to Dec-99.|
|Figure 2: Daily chart of the Shanghai Composite.|
|Graphic provided by: MetaStock.|
|While weekly charts are great for perspective, it often helps to use a shorter time frame for timing. On the daily chart, the index is consolidating just above the support zone shown on the weekly chart. Bollinger Bands have been overlaid and the magenta indicator shows the Bollinger Band width as a percentage of the closing price. As the indicator shows, a narrowing of the bands (below .06) usually precedes a significant move. As the move occurs, the band will again widen (vertical blue lines).|
|Bollinger Bands do not have a directional bias and traders must turn to other methods for direction clues, such as support and resistance. Notice how the bands tightened in November and the resistance break resulted in a strong advance. The breakout in March was not a good signal, but the support breaks in April and June produced good moves. With the Bollinger Bands narrowing (below .06) in mid-July and now moving above .06, the odds of a move are increasing. Turning to support and resistance for directional confirmation, a close below 1370 would be bearish and a close above 1470 would be bullish.|
Note: Bollinger Band Width = (upper band - lower band) / closing price of the security
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