China `See-Saw' Stocks Signal False Rally Will Falter: Technical Analysis

Future rally attempts for the Shanghai Composite Index may falter after the benchmark gauge dropped below 3,000 last month, according to Chart Partners Group Ltd.

“After the failed 3,000 breakout we have now declined back to key support at 2,790, where trendline support and the 200-day moving average coincide,” said Thomas Schroeder, managing director at Chart Partners in Bangkok. The failure “does increase odds that a future rally attempt will not only disappoint but may very well turn south. See-saw swings above and below key breakout points have a tendency to precede false rally cycles,'' he said.

The Shanghai gauge gained 34 percent between this year’s closing low on July 5 and high of 3,159.51 on Nov. 8, boosted by expectations central banks around the world will inject more cash into their economies. Since then, the index has lost 9.1 percent to 2,870.35 after the government raised interest rates for the first time in three years in October and twice ordered banks to set aside larger reserves last month.

Schroeder, who predicted in October that the mid-year rally might falter, said the index needs to “sustain action above” 3,000 to reach a “major pivot point” of 3,200. The measure may advance to a “macro resistance point” of 3,500 if it stays above 3,200, he wrote in an e-mailed response to questions by Bloomberg News.

Copper prices will also determine whether China’s stocks can resume a rally that drove the Shanghai Composite to a seven- month high on Nov. 8, he said. The metal’s price rose to a record in London and reached $4.11 a pound in New York, the highest level since May 5, 2009. Higher prices underscore economic expansion in China, the biggest consumer of the metal.

Copper is Key

“One important variable is copper and its ability to clear the key $4.10 major top barrier, representing a bull/bear bias for China,” Schroeder said.

The Shanghai measure has fallen 12 percent this year, Asia’s worst performer, on concern that monetary tightening will curb economic growth.

In technical analysis, investors study charts of trading patterns and prices to predict changes in a security.

--Allen Wan. Editors: Reinie Booysen, Richard Frost

To contact the Bloomberg News staff for this story: Allen Wan at awan3@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net

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