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China: Potential for a Meaningful Rally

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In the case of Shanghai Stock Exchange Index, there is a convergence of key technical criteria that suggests that a meaningful rally is near.

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The Shanghai Stock Exchange Index (SHA:000001) has been in relentless decline since the middle of 2009 and is now near the 200-month SMA. The monthly chart seen below is showing a positive divergence between price and RS at the most recent lows. As well, the index has declined to its lower channel line.

Could a rally be in the offing? Let's dig a little deeper.

Shanghai Stock Exchange Index (Monthly)



Once an index stabilizes at or near the 200-month SMA there is a high probability that it will begin a bear market rally that will top near the declining 200-week SMA. In the case of the Shanghai Stock Exchange Index the weekly chart is showing a positive divergence between price and RS at the most recent lows, and it is currently 31% below the 200-week SMA. The 31% is the widest deviation from the 200-week SMA since mid-2010.

Shanghai Stock Exchange Index (Weekly)



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