For anyone following the Shanghai Composite Index, we appear to be on the cusp of a significant change in the Index. Below is what we believe to be a “flag” or “pennant” formation that is about to come to a conclusion. First, let’s address what a “flag” or “pennant” formation is from the most credible source on technical analysis.
“A Flag looks like a flag on the chart. That is, it does if it appears in an up trend; the picture is naturally turned upside down in a down trend. It might be described as a small, compact parallelogram of price fluctuations, or tilted rectangle, which slopes back moderately against the prevailing trend (Robert Edwards & John Magee. Technical Analysis of Stock Trends. International Technical Analysis Publishers, Boston. 1991 edition. page 202).”
Additionally, Edwards and Magee said the following of this consolidation pattern:
“These pretty little patterns of consolidation are justly regarded as among the most dependable of chart formations, both as to directional and measuring indications. They do fail occasionally but almost never without giving warning before the pattern itself is completed (Robert Edwards & John Magee. Technical Analysis of Stock Trends. International Technical Analysis Publishers, Boston. 1991 edition. page 211)."
We cannot attest to the outcome that should be expected for this pattern. However, we do believe that based on the level of volatility exhibited by the Shanghai Composite Index in the past, there should be a lot of fireworks ahead. Leaving aside our view on the matter, Edwards & Magee indicated that the completion of a flag or pennant pattern indicated above is normally bullish.
From all accounts, we’re only days (two weeks at most) away from a conclusion of the above pattern signifying a continuation of the declining trend established in 2015 or a test of the upside target at 3,911. Our speculative AND investment considerations (two very different positions) are found in our September 14, 2016 posting.