China Stocks’ Triangle Break Signals Losses: Technical Analysis
The Shanghai Composite Index (SHCOMP) will likely fall to 1,700, a 15 percent drop from yesterday’s close, after the benchmark index broke through a triangular consolidation trading pattern, according to Chart Partners.
The benchmark index’s slide below “big resistance” at 2,100 and the break of the triangle foreshadow a retreat to 1,700 in the “medium term” and possibly to 1,500, Thomas Schroeder, Bangkok-based managing director at Chart Partners, wrote in an e-mailed response to questions.
The Shanghai measure dropped as much as 0.5 percent today to 1,998.40, the second time it went below 2,000 this week amid concern the nation’s new leadership may slow efforts to reduce the government’s grip on the economy. The index retreated 0.4 percent to 2,001.76 as of the 11:30 a.m. local-time break.
The bear triangulation “has not only broken back below 2,100 but taken out pattern support,” Schroeder said. “This will see a new low, uptick and then slide toward 1,700 medium term with risk to 1,500 where I would turn bullish on a macro basis.”
Schroeder said in February a rally by the Shanghai Composite was a “false bounce” that might falter as a so- called rising wedge pattern mirrored previous failed rebounds. The index reached its high for the year on March 2 and has since tumbled 19 percent amid concern a slowing economy will curb earnings growth.
The Shanghai Composite’s 14-day relative strength index fell to 32 today, according to data compiled by Bloomberg. The RSI measures how rapidly prices have risen or dropped during the specified time period. Some traders use a drop below 30 as a signal to buy.
Shanghai Composite is seeing “weakening price momentum,” Tacky Cheng, a Hong Kong-based technical analyst at Nomura Holdings Inc., wrote in a report dated yesterday. “The RSI also had a negative breakout from an upward channel recently,” said Cheng, who puts “primary support” for the Shanghai Composite at the 1,945 level.
Technical analysts look at price charts to forecast resistance levels, or ceilings restricting further price increases, and support levels, or floors limiting declines.
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