Bull Back In The China Shop?

Looks that way. China's stock market came flying out of the gate after being closed from the end of September through October 7th. Since then Shanghai Composite is up by more than 7.75%. China had been one of the weakest performing countries for the past 6 months. The index has now entered a new bull market as well. A bull market is defined as any 20%+ gain that was preceded by a decline of at least 20%. From its low on July 5th, the Shanghai Composite is now up 21%.

Darryl Guppy: Increasing currency volatility, central-bank intervention, continued weakness in the US dollar and a crescendo of poorly informed opinion prior to mid-term US elections all add up to market moving events.

Meanwhile, China has been quietly offering support for beleaguered European nations battered by the ongoing debt crisis. This is very significant for a market that has been closed for almost two weeks because of the confluence of holidays.

The Shanghai market has been moving in a prolonged sideways trading band. Support is near 2,580 and resistance is near 2,680. These are the key trigger levels and they also provide a method for calculating the potential upside or downside movement. The width of the consolidation band is measured and used to set the target.

A break below support at 2,580 has a target near 2,480. A break above resistance near 2,680 has an upside target near 2,780. Moves above or below these trigger levels have a high probability of moving rapidly. This gives rapid access to good profits for an upside breakout, but it also points the way to quick losses in a downside break.

On balance, we remain bullish for two reasons. The first reason is the long term inverted head-and-shoulder trend reversal pattern. The consolidation is consistent with this type of pattern, although it has continued for longer than usual. The second reason is the powerful upsurge in the short trading period between the two holiday breaks. This surge developed despite the increase in tensions with Japan and continued attacks on the valuation of the renminbi. In this sense, the news in the last week was already accounted for in the index activity last week.

Our bullish bias is tempered by the continuation of volatility within the consolidation band. This is not a market for the nervous.