Below are the upside resistance targets for the Shanghai Composite Index for both the short and long-term moves.
Short-Term Targets
Based on the price action since January 2019, the Shanghai Composite Index has conformed to the upside resistance targets ranging from 3,012.38 to 3,378.93.
The short-term upside resistance target determines market sentiment for achieving the 3,559.47. So far, the market appears on course to achieve a re-test of the prior low at 2,464.36. The theory of the re-test is known as a double top, or in this case a double bottom, as described by Charles H. Dow in 1901.
"Another method is what is called the theory of double tops. Records of trading show that in many cases when a stock reaches top it will have a moderate decline and then go back again to near the highest figures. If after such a move, the price again recedes, it is liable to decline some distance (Dow, Charles H. Wall Street Journal. July 20, 1901.)."
The expectation should be that after obtaining a new low or a new peak, the price will trend in the opposite direction and then re-test the prior extreme level. In this case, it is the 2,464.36. This makes the 3,012.38 upside resistance level a reasonable level for expectation on the way to the down from the current level as diagramed in the chart above.
Long-Term Targets
The most important factor to watch for is the long-term trend in the Shanghai Composite. The chart below outlines the long-term prospects for the index.
Since June 2015, the Shanghai Composite Index experienced a crash in the price to the 2,655.66 level by January 2016. The index has been trading in a range since early 2016 which according to Charles H. Dow is more meaningful than a stock market crash (either up or down).
“Such a narrow fluctuation, to the experienced student of the averages, may be as significant as a sharp movement in either direction. (Rhea, Robert. The Dow Theory. Barron’s. 1932. page 82.).”
We consider the price action since 2016 the equivalent of crash especially consider the staggering amount of money and effort applied by the Chinese government to stop the decline as noted on March 8, 2018 and September 16, 2018.
The more time passes the easier it gets to exceed the minimum upside resistance target of 3,815.82. The problem comes up when the market fails to breakout out on the upside in spite of the passage of time. Because we expect a re-test of the downside target, we’re thinking that it’ll be at least six months before we see a concerted move above the 3,815.82 level.
The good news is that buying Chinese stocks at or below the current level of 2,905.19 could be considered, if the Chinese market was a part of a well diversified portfolio, a good investment.