These reports do not square with the reality on the ground. Two weeks ago, I drove some 1,000km from Beijing to Shandong to climb Mount Taishan. It is a four- to six-lane highway for the entire distance and crowded with heavily laden lorries 24 hours a day travelling in both directions. They make up more than 90% of the traffic and they are loaded with everything, from heavy industrial castings to triple- deck racks of cars, from covered loads that defy gravity and balance to steel shipping containers.

 

This is an economy literally on the move. There are dangers in the speed of growth, but it seems chur lish to focus almost exclusively on this when many major developed economies are struggling to get growth above a few percentage points.

 

Speed bumps, such as those created by tightening, specifically directed at the overheating housing sector, are not the same as economic crashes. They slow growth from near 12% in 1Q to the longer-term average of around 9%. This growth moderation is reflected in the Purchasing Managers’ Index fall from 55.7 in April to 53.9 in May. The moderation reflects an increasing confidence about the sustainability of growth and this is reflected in the technical behaviour of the Shanghai Composite Index. Market behaviour gives the inside information on the economy several months before the fundamental economic reports confirm developments.

 

The Shanghai Composite Index is developing a classic breakoutconsolidation pattern. This pattern may have one final sting in the tail, which will provide opportunities for investors with courage.

 

The breakout parts have four features:

1. Relative Strength Index (RSI) divergence;

2. Trend-line breakout;

3. Use of the trend line as a sliding support area; and

4. A retest of historical support prior to an uptrend rebound. This is where the sting in the tail is located.

 

The first feature is the weak RSI divergence pattern. The RSI divergence signal is a delayed one because the low in the RSI does not occur at the same time as the low in the index. The RSI low developed on May 7. The low of the Shanghai Index developed on May 21. There is a two-week difference between the signals. This is unusual and suggests traders need to exercise caution as the breakout-trend retreat last week has confirmed.

 

The second feature is the breakout from the downtrend line. This was a strong breakout, but it has not developed momentum. A small resistance level developed near 2,680. This has no historical significance, but it is a reference point for future trend development. A move above 2,680 is confirmation of strength in the new uptrend.

 

The third feature is the use of the downtrend line as a new support area. The retreat from 2,680 uses the trend line as a support level. The market moves lower until it hits a long-term historical support area. This is the area of interest in the next week.

 

Often, the previous low of the trend provides a support area for the successful trend rebound. This is a double-bottom pattern. The low of the downtrend is near 2,481. A double- bottom rebound developed when the current market retreat also rebounded from this area. The technical problem is that the previous trend pivot-point low at 2,481 is not a historical support area. The next strong support area for the Shanghai Index is near 2,300. This is the upper edge of a long-term historical consolidation band. This increases the probability that the market will continue to slide down the downtrend line towards the 2,300 level.

 

The May 21 pivot-point low is significant and may develop as a base for a consolidation between 2,481 and 2,680. There is a strong proba bility the market will temporarily dip towards the historical support at 2,300 and then rapidly rebound. This dip could develop as a one-day fall or rebound, or a three-day pattern. The key features confirming the temporary nature of this dip is the reduction in volume as the market falls and the increase in buying volume as the index rebounds. A rapid dip below the 2,481 level does not invalidate the development of the consolidation pattern between 2,481 and 2,680.

 

The consolidation pattern is a very bullish development, because it lays the foundation for the stronger sustainable trend rebound above 2,680.

 

The lorries on the move through Hebei and Shandong provinces confirm the underlying sustainable strength of the market that is reflected in the Shanghai Index chart. (See Chart)