Shanghai Surprise?

• Posted by Greg Harmon
• on May 22nd, 2015

The above definition is from the dictionary, the Urban Dictionary that is. I like to put normal everyday words and phrases into it to see what it comes up with. It can be quite entertaining. And in the case of Shanghai Surprise, if you get beyond the innuendo, quite apt at describing the Shanghai Composite over the last few months.

The Shanghai Composite ($SSEC, $ASHR), China’s stock market index, has had a monster run over the last 12 months. The move has been so strong that every time it gets to a frothy level and the world of traders are ready to short it, it takes another leap forward. So now that it is peeking above consolidation again at a major resistance level will it finally happen? Or will it give a Shanghai Surprise. Lets take a step back and look at the longer picture.

The monthly chart of the index below shows some interesting price action. First, there was a run higher from 2006 to the peak in 2007 that was nearly 2.5 times as big as the current move. So maybe it can stay frothy. The momentum indicators support that view as well. The RSI is nearing the peak from 2007 but the MACD is still well below its peak.

Many will note that the index is outside of the Bollinger Bands®. This can be a signal of short term momentum running out, a need to pullback or move sideways. But the Shanghai Composite has been no stranger to long runs out of the Bollinger Bands either.

There are also 3 large technical patterns playing out. The first is the break of the symmetrical triangle. This one targets about 4050. Do you remember the short consolidation at that point? The next is that the price has reached a 61.8% retracement of the leg lower. This is a key Fibonacci ratio for traders and would lead to many taking some profits. And yes we are seeing another consolidation around 4400.

The final pattern is a bearish Bat harmonic. This is measured from the 2007 peak to 2008 trough, the 2009 bounce and pullback, and now the final rise. This pattern looks for completion and a Potential Reversal Zone (PRZ) at an 88.6% retracement of the initial leg lower. This is not until about 5600 on the index. At that point traders would look for a sign that a reversal may happen.

The funny thing about a Bat harmonic though is that it can transform into a Crab harmonic. This would take place if it does not stop at 5600. In a Crab harmonic the PRZ is measured at a 161.8% retracement of the initial leg. That would mean a rise to over 8835. That would be really close to 8888, probably the luckiest level for the Composite. This market could have a long way to run still. And with the easy monetary policy that China has embarked on it is not really that crazy. How many traders or investors that you know are looking for the Shanghai Composite to reach 8800?

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