The index to watch in the coming week is the Shanghai Composite Index (SSE) as it represents the raw emotions of the stock market in China. Below we have applied Edson Gould’s Speed Resistance Lines [SRL] to the SSE to determine the potential downside targets to watch for.
The SRL is ideally suited for a stock or index that has experienced a parabolic move to the upside. When viewed from a historical perspective, the Shanghai Index meets the criteria of entering the entropy stage.
Already the Shanghai Composite Index has declined below the conservative downside target of 4,012.56. The July 23, 2015 upside failure coincided with the ascending conservative target. This is the first true test of weakness in the upside move. The next move in the price to the downside should confirm the downside move or indicate the ongoing battle between buyers and sellers. The point indicated as the critical support will reveal the overall short-term direction of the index. Although the move up or down is academic, it is the size of the move that will be most fascinating as we believe it will be massive.
Because the Shanghai Composite Index has a history of parabolic rises and subsequent crashes, our guess is that declining to the 1,722.12 level should be expected. In addition, if the SSE were to replicate the previous rise and fall in the period from 2005 to 2008, the index could drop as low as 1,447.37.