The Shanghai Composite has at least 25% upside left

• Posted by Greg Harmon
• on April 28th, 2015

Yes, I know that the Shanghai Composite has already doubled in the last 8 months. This guy has a huge pile of money. There are stories of market froth everywhere. The word “Bubble” is thrown around everywhere. Most investors would describe this market as the one market most ready for a correction. I will not disagree that there it has run a long way in a very fast timeframe. But despite that there are clear signs that there is still 25% or more upside to go in the Shanghai Composite.

The chart below gives the clues. First, there is the big harmonic pattern, a Bat. It does not complete, with a Potential Reversal Zone, until 5616. Price is also moving above the 61.8% retracement of the down leg. The next stop could be a full retracement. The rest of the indications require you to leave your comfort zone. I’ll try to help with that.

Look at the Bollinger Bands®. The price is running hot, outside of the Upper Band, but this has happened before. Look at the candles from November 2006 to May 2007. Each closed outside of the Upper Band. 7 months in a row. What happened after that? One month of sideways action before another leg higher. The current run is only at six months outside of the Upper Band.

MACD is another sign. If you only looked at the rising MACD since 2009 you would see a very large rise out of a flat period. This might make you nervous about a possible pullback. But look at the level of the MACD compared to where it was at the peak in 2007. it is less than half! Remember a rising MACD is bullish, not a sign of worry.

Finally look at the RSI. RSI is a measure of momentum. And it is strong. You may have been taught that an RSI over 70 is overbought. That is a fair definition. But overbought can be become more overbought. Again look at the run higher in 2006 and 2007. The RSI was overbought from October 2006 until October 2007, 1 full year. And what did the price do over that timeframe? It rose 244%! The current run became overbought in December, a mere 5 months ago.

I am not suggesting that the Shanghai Composite will continue to move up in a straight line. But it is naive and just dead wrong to assume that when some conditions get overbought it is time to sell. Especially when you have a historical precedent that was around just a few years ago. You don’t have to agree, me and my friend above will be happy to continue to stack up money without you.

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