Originally published by guppytraders.com
The double bottom or W breakout pattern in the Shanghai index has developed successfully and the rally has paused just below the target level of 3200. The upside target for the W pattern is near 3200 and the index is consolidating near this level.
The W pattern is a trend change pattern so investors expect the index to move higher. The next upside target is calculated using trading band projection methods. The width of the trading band is measured and projected upwards. This sets an upside target near 3265 which is also a previous resistance level.
These pattern projection targets do not show how the new uptrend will develop. The key guide is the Guppy Multiple Moving Average (GMMA) relationships because this provides a guide to the strength of investor sentiment and the confidence of traders..
The long term GMMA reflects the thinking of long term investors. The long term GMA has compressed and is turning upwards. This shows that investors are becoming more confident about the future direction of the Shanghai Index so when the index retreats, the investors enter the market to buy. In the future investors watch for an expansion of the long term GMMA group of averages because this confirms strong investor confidence in the new uptrend.
The Shanghai Index has developed a classic GMMA breakout, retreat and rebound rally pattern as the longer term index uptrend develops. The first rally in the first week of June carried the index above the value of the upper edge of the long term GMMA. The retreat successfully tested the lower edge of the long term GMMA as a support level. The recent rebound rally moved above the upper edge of the long term GMMA and confirmed the development of a longer term uptrend.
Daryl Guppy is a leading international financial technical analysis expert and special consultant to Axicorp. Guppy appears regularly on CNBC Asia and is known as "The Chart Man". Disclaimer: Daryl Guppy is not a financial advisor. These notes are for educational purposes only and provide an example of applied technical analysis.