INCREASING EVIDENCE SUGGESTS the green shoots in the US are withering. The bamboo shoots in China, however, show no evidence of this. The test of the Shanghai Index resistance near 3,000 is not a signal for a general market retreat.

 

The Shanghai Index has a high probability of developing a sideways trading pattern. This pattern may include a retest of support near 2,800. There is a low probability of a rapid and sustainable breakout above resistance near 3,000. There is a higher probability of a volatile exhaustion retreat from near 2,900 to 3,000. This has been the normal behaviour of the index when it reaches each resistance level.

 

The Shanghai Index is moving into the long-term resistance consolidation area between 2,900 and 3,000. In 2007 the market used three months to pause in the 2,600 to 3,000 level. This was a broad consolidation range. The breakout from this range quickly moved to 3,900. In 2009, the conditions are different, so, any move above 3,000 resistance will not have the same behaviour.

 

The most important difference is that in 2007, the market had already developed a breakout from the downtrend in early 2006. The consolidation between 2,600 and 3,000 came after good long-term trend development. In 2009, the new trend breakout has been developing for about eight months. The trend is strong, but not as strong as in 2007. This means there is a higher probability the market will not quickly break out above resistance at 3,000. The market may make a temporary breakout above 3,000 but there is a high probability the market will oscillate around the 2,900 to 3,000 level.

 

A move above 3,000 has several important resistance levels. These were created when the market was falling last year. The first resistance level is near 3,300. In June 2008, the market gapped down from this level. This type of activity often signals an important resistance level when the new uptrend develops.

 

The next resistance level is at 3,800. This was a resistance level last year. It was also a strong support level in July 2007. This behaviour suggests the 3,800 level will again act as a very strong resistance level.

 

When we use the weekly chart of the Shanghai Index, we can also see how the current situation is different from that in 2006. The Guppy Multiple Moving Average (GMMA) indicator on the weekly chart shows the trend breakout is in an early development stage. The short-term GMMA has not yet moved fully above the long-term GMMA. When the trend breakout develops, it is common for a temporary trend retreat to develop and use the upper edge of the long-term GMMA as a support rebound area.

 

A temporary trend retreat could fall to the 2,600 level and rebound. This behaviour is consistent with the long-term trend development. A very strong temporary retreat could fall to 2,500, which is the value of the lower edge of the long-term GMMA.

 

The long-term uptrend reversal is confirmed when the lower edge of the short-term GMMA moves above the upper edge of the long-term GMMA. This is a lagging indication of the trend change. It is important because it confirms the long-term sustainability of the new uptrend. The daily Shanghai Index chart confirms trend strength with a steady separation in the long-term GMMA. The lower edge of the long-term GMMA is now above the support level at 2,600. When the lower edge also moves above the upper edge of this support consolidation band at 2,700, then it shows a sustained level of investor confidence.

 

Traders continue to watch the development of a relative strength indicator divergence pattern. Traders use this indicator to give warning of a significant trend change. There is a small degree of divergence developing. This could signal the start of a sideways pattern and a broad trading band in the 2,900 to 3,000 area. This sideways development would move the value of the index closer to the value of the upper edge of the long-term GMMA and the value of the long-term trend line. It shows a pause in the trend. It does not show a change in the direction of the trend.