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THE CHINA CUP pattern identified two weeks ago has failed to develop. The chart pattern is developing into a more complex cup-and-handle pattern. The handle is developing from the high point of the breakout trend near 3,100.
At this stage of market development, traders need to be alert for several different results. They are, first, a cup-and-handle pattern. Second is a small retreat-and-rebound consolidation pattern at the 2,850 to 3,100 level. The third is a larger retreat and a retest of the 2,650 support level and the long-term trend line. There are key trigger development points for each of these potential results. The second and third potential developments show that the cuppattern analysis was incorrect.
The cup-and-handle pattern must meet these development conditions:
- The lowest closing price in the handle pattern should not fall below 2,900;
- The upper and lower edges of the handle should be defined with two parallel trend lines; and
- The breakout above the upper edge of the handle trend line is a bullish signal. It has an upside target near 3,350.
A move below 2,900 shows the market is moving into a different development. The bullish development is the creation of a consolidation pattern between 2,850 and 3,100. This consolidation pattern must meet these development conditions:
- Develop a support pattern near 2,850;
- Develop short-term rally rebounds and retreats between 2,850 and 3,100;
- Create a trading band defined by parallel support and resistance lines; and
- Use the consolidation pattern as an upside breakout pattern. This gives the first target near 3,350.
A move below support near 2,850 suggests the market will test the value of the longest-term uptrend line 2 near 2,650. This is the trend line that began last November and uses the low of last December and this December, and January to calculate the correct position of the uptrend line. The current value of the longestterm trend line is near 2,620. This pattern must meet these development conditions:
- The retreat finds support near the value of the long-term uptrend line;
- The index rebound from the value of the long-term trendline;
- The index retreats from the value of the resistance level near 3,000; and
- This broad trading band continues to have strong rally-and-retreat behaviour. This is a trend correction using time. The market moves sideways and uses the long-term uptrend as a support level.
The longest-term trend line 2 is now above the historical support level at 2,600. The current degree of separation is small but, as weeks pass, this difference will become much larger. The importance of this lies in the way the long-term trend line 2 provides a bullish bias to the trading activity within the trading band. Rather than price falling all the way to the lower edge of the trading band, there is now an increased probability that the index will find support on the long-term trend line. This rising level of support creates a bullish bias to the consolidation pattern and increases the probability of a successful breakout.
There is currently a small Relative Strength Indicator divergence pattern, a weak pattern that suggests a consolidation period rather than a trend reversal.
Each of these patterns is used to project potential price targets and gives a price target in the 3,350 to 3,400 range. This confluence of conditions moves beyond coincidence and suggests there is a significant probability of the market breakout reaching these levels.
It is too early to know which of these three patterns will develop. Understanding the important features of each pattern helps traders to quickly develop the best trading strategies.
