• The trend direction of the index;

• The features that provide support and suggest the end of the downtrend; and

• The features that inhibit an easy rise and a change in the general trend direction.

 

The trend direction for the index on the weekly chart is down. This has been a steady and sustained downtrend since the high of 3,000 in April 2011. The downtrend has been interrupted by several rallies, but these have all been within the context of the downtrend. None of these has been strong enough to break the short-term downtrend line. This has been a gradual and prolonged fall to a soft landing that reflects government efforts to cool the economy and manage inflation. It is not a precipitous market collapse.

 

Beijing has been slowly easing tight monetary and fiscal policy. Premier Wen Jiabao calls this “fine-tuning” the economic policy. The banks’ required reserve ratio is expected to drop another 200 basis points after Spring Festival.

 

Small business is in line for tax breaks. The government is making credit more available to small and medium-sized enterprises,which were heavily hit by the tight monetary policies used in 2011 to fight inflation.

 

A steady erosion of capital is less frightening than a calamitous sudden collapse, but the result is the same. For investors, the slow and steady fall in 2011 has not been good news.

 

The features that provide support, and the potential for a rebound, are the three levels of strong historical support. Once broken, these levels act as a resistance level, inhibiting the market rise.

 

The most important of these is near 2,000. This was the top of the consolidation range when the market developed a bottom in late 2008 and early 2009. A fall below this level tests the 2008 lows near 1,700. The current rally rebound starts in mid-air. It does not start from any well-defined historical support level and that suggests this rebound is less reliable as a trend break.