Roaring up a whopping 59 per cent in the first six months, the daily chart of the Shanghai Composite index suffered a serious set-back with a gap and a crash below trend line support. Massive daily price moves as we thrash around the highest levels in years, support provided by the rising Ichimoku cloud - for now anyway - which is just bullish, though the moving averages have crossed to a sell.
Keeping all the above in mind, let's look at the weekly chart to see how data from the first maps out in a slightly longer time frame. We see a huge Marabuzo candle (big, bold and bearish with negligible wicks at either end) starting at this year's high; it completely dwarfs all the others. Imagine it as a sort of full stop with added weight because it is also a bearish engulfing candle - covering the previous three, the first of which is a huge doji denoting indecision. All of this takes place at the psychological level of 5,000 suggesting some are getting skittish. Very long-term trend line support is just about holding and prices remain above the 200-day moving average; so despite a very serious setback, this two-year-old rally is theoretically still intact.
Now let's see how these two look when scaled up to monthly candles. Drifting interminably in relatively small ranges since 2009 it did not follow other global indices, most of which saw stellar rallies since the financial crisis. Therefore Shanghai’s 2014 burst higher can be seen as the index playing 'catch up'. A huge spike high at the psychological 5,000 in May, retracing 75 per cent of the collapse from record high in 2007, was the first warning sign that the rally might be overdone. June's massive doji against the Fibonacci 78.6 per cent retracement resistance another major warning sign that there is serious instability above 4,000.
Our final chart is of quarterly candles, since China 'got' capitalism in the early 1990s; volume for each period is plotted in the lower chart. The secular trend is clearly higher, with the index holding inside a trend channel rallying at about 20 degrees most but not all of the time. Price action in Q2 2015 is a massive spike high against 78.6 per cent resistance, then slumping to close below the Fibonacci 61.8 per cent retracement level - a serious rejection from this year's high. Volume during this quarter about seven times the average of the last decade and smacks of euphoria, margin trading, and massive media coverage: I think you will agree, "Houston, we have a problem." It reinforces the Jekyll and Hyde nature of the index, plodding along most of the time and then subject to huge speculative bubbles - which ended in tears last time round. Looking at these four charts there is a high probability that something similar might happen again.
Above all, there is no way that looking at these charts we can recommend buying the index, though a period of consolidation following this fortnight's huge losses might come next. Then, suggested downside targets lie at 3,675 and 3,200 - with or without central bank accommodation.
MORE FROM NICOLE ELLIOTT...
Nicole Elliott is a long standing Member of the Society of Technical Analysts and has just taken over the IC's trading coverage. She is regularly interviewed and quoted by the financial media, is a conference speaker, and author of several books on charting.
