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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)






I was unable to locate any seasonality charts for the Shanghai Stock Exchange Index, but the seasonality chart for the Hang Seng (INDEXHANGSENG:HSI) is very bullish into the end of the year.



Stacking The Probabilities
  • Positive Divergence: The monthly and weekly charts of the Shanghai Stock Exchange Index show a positive divergence between price and RS.
  • Trend Deviation: The index has declined to the 200-month SMA which indicates an extreme deviation in the bear market trend. Likewise, the weekly chart is showing the widest deviation from the 200-week SMA since mid-2010.
  • Seasonality: On the margin, the seasonality chart for the Hang Seng points to strong gains into the end of the year.
As traders/investors we seek to stack as many probabilities in our favor prior to the allocation of capital. In the case of Shanghai Stock Exchange Index, there is a convergence of key technical criteria that suggests that a meaningful rally is near. I anticipate a rally of 25-30% in the coming weeks/months.

This article was originally published on See It Market.
No positions in stocks mentioned.
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