Get Ready for a Chinese Rally: Ritholtz Chart

Barry Ritholtz is a Bloomberg View columnist. He founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He blogs at the Big Picture and is the author of “Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy.”
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China is on the verge of breaking out from its pattern of consolidation, at least according to the monthly chart book from the analytics team at Bank of America Merrill Lynch.

If you look at the chart above you can see that the Shanghai Composite Index is in the midst of transitioning into an upward trend. Stephen Suttmeier, a technical research analyst at Bank of America Merrill Lynch, notes that we've reached the end of a five year downtrend and are set up for a breakout.

The two periods highlighted in the chart appear to be similar -- each lasts about four years. The one-year rally following the prior breakout gained 300 percent, though I doubt anyone at Merrill is looking for another rebound of that magnitude.

Technical analysis textbooks suggest that the value at the start of the wedge is the initial upside target for any subsequent breakout. In this case, it argues for a move back to its August 2009 level of 3,477. That would be a gain of 55 percent from the most recent closing price.

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