On August 26, 2015, the Shanghai Composite Index traded as low as 2,850.71. While the most recent rise may only be a bear market rally, we think that resistance to the rise might kick in around the 4,400 level. Rising above 4,4oo would suggest that a run to the previous peak of 5,166.35 is not out of the question. Keep in mind that a bull market in this index is not confirmed until the index exceeds the prior high, until that time the Shanghai Composite is in a bear market rally.
On August 23, 2015, we said the following:
“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.”
So far, the Shanghai Composite Index (SSE) has confirmed that the direction of the index is down, now it is only a matter of magnitude. Already the Shanghai Composite Index has reached the mid-range downside target of 2,867.34.
A large bounce at this level is hoped for as a continuation of the declining trend could spark a genuine panic. If an upside bounce were to occur at this level, the SSE would face resistance at the ascending conservative downside target of 4,012.56. It would be a +48% rise to the 4,400 ascending conservative downside target from the close of August 25, 2015.
The flip side of a reversal to the upside is a decline to the extreme downside target of 1,722.12. Our breakdown of the potential reversal points are as follows:
The actions of the Chinese government have not been constructive for a change in the declining trend of the market. The sooner restrictions intended to stop prices from falling are lifted the better the chance for Chinese stocks to fully recover. The more involved the government becomes in the stock market the more we believe that 1,722 on the SSE is likely to occur.
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.