Shanghai Composite peaked in October 2007 at 6124 after rising almost six fold from July 2005 low of 1015. Then along with rest of the global equity markets it crashed, finally bottoming in October 2008 by reaching a low of 1665. Since then once a global leader, it has been a global laggard. In the post financial crisis rally, it recovered slightly more than 38.2% Fibonacci retracement level of the big fall whereas S&P 500 recovered to 89% Fibonacci level.
Moreover, Shanghai Composite made a post-financial-crisis high in August 2009 but S&P made its last high in September 2012. Since August 2009, the Composite has been trending down retracing to 78.6% Fibonacci level of the rise from 2008 low to 2009 high. But, now the index seems to be ready for, at least, a short term bounce as the weekly chart is showing a 9-period RSI divergence. The chart below is in log scale to include the complete weekly price action from 2005.
The daily chart is also indicating a higher likelihood of a bounce. After making a fresh low since August 2009, the index bounced off, forming a hammer on November 19th and it also made a Wyckoff Spring pattern. Then on Wednesday it formed a bullish engulfing candle in higher volume. In the process it successfully tested the low of the hammer. This increases the chance of a test of October high of 2138, which was the resistance level formed by the lows made on last December-January. Twice the index retreated from this level. Will third time be the charm?
FXI – iShares FTSE China 25 Index Fund – is a good proxy for the Shanghai Composite. And, FXI price action is slightly more encouraging than the index. In 2012 when the index was busy making lower lows and breaking below the lows of 2011, FXI was making a symmetrical triangle staying above the low of 2011. The pattern is more visible on the weekly chart. In October, it broke above the upper limit of the triangle. Since then it has retraced to test the breakout and is again poised to continue the breakout.
The FXI price action on daily chart is also conducive to a bounce. On Monday, November 19th, FXI made a bullish golden cross – 50-Day SMA moved above the 200-Day SMA. The daily chart is also showing few patterns. The first is a horizontal channel that the ETF made between June and September. After breaking out, it almost reached the measured target but was thwarted by the resistance made by the May 2012 high. Since then it seems to be successfully defending the breakout.
The other pattern was an ABCD pattern – indicated by A1-B1-C1-D1 on the chart. The CD leg was almost twice of the AB leg.
Now a third pattern is emerging – another ABCD pattern. Here A2 is C1 and B2 is D1. If today’s bullish engulfing in Shanghai Composite withstands the US session open, then FXI’s Thursday’s low of 35.45 has a higher chance of making the C2 point of the second ABCD pattern.
The first measured target of this pattern is estimated to be 41.60 with AB=CD ratio. This is slightly above the high of 2012 and is 15% above Tuesday close of 36.19. The second measured target at 1.618 times of AB is estimated to be 45.39, which will take the ETF to the high of symmetrical triangle on weekly chart and 25% of Tuesday close.
Off course, both, the Shanghai Composite and FXI, made up-&-down movement over the last couple of years resulting in a number of resistance levels. The ETF will have to overcome them along its move toward the measured targets. These targets are not guaranteed but the chart is showing that such a move is plausible. Further price action will validate or invalidate the probabilities. Also, Europe saga is a big overhang on the global markets and could derail even a high probability pattern, which the FXI’s ABCD pattern is not as there are still serious questions about China’s leadership change, her current overcapacity and general economic weakness. So caution is advised and tight stops.