On August 26, 2015, the Shanghai Composite Index traded as low as 2,850.71. While the most recent rise may only be a bear market rally, we think that resistance to the rise might kick in around the 4,400 level. Rising above 4,4oo would suggest that a run to the previous peak of 5,166.35 is not out of the question. Keep in mind that a bull market in this index is not confirmed until the index exceeds the prior high, until that time the Shanghai Composite is in a bear market rally.
On August 23, 2015, we said the following:
“The next move in the price to the downside should confirm the downside move or indicate the ongoing battle between buyers and sellers. The point indicated as the critical support will reveal the overall short-term direction of the index. Although the move up or down is academic, it is the size of the move that will be most fascinating as we believe it will be massive.”
So far, the Shanghai Composite Index (SSE) has confirmed that the direction of the index is down, now it is only a matter of magnitude. Already the Shanghai Composite Index has reached the mid-range downside target of 2,867.34.
A large bounce at this level is hoped for as a continuation of the declining trend could spark a genuine panic. If an upside bounce were to occur at this level, the SSE would face resistance at the ascending conservative downside target of 4,012.56. It would be a +48% rise to the 4,400 ascending conservative downside target from the close of August 25, 2015.
The flip side of a reversal to the upside is a decline to the extreme downside target of 1,722.12. Our breakdown of the potential reversal points are as follows:
The actions of the Chinese government have not been constructive for a change in the declining trend of the market. The sooner restrictions intended to stop prices from falling are lifted the better the chance for Chinese stocks to fully recover. The more involved the government becomes in the stock market the more we believe that 1,722 on the SSE is likely to occur.
The index to watch in the coming week is the Shanghai Composite Index (SSE) as it represents the raw emotions of the stock market in China. Below we have applied Edson Gould’s Speed Resistance Lines [SRL] to the SSE to determine the potential downside targets to watch for.
The SRL is ideally suited for a stock or index that has experienced a parabolic move to the upside. When viewed from a historical perspective, the Shanghai Index meets the criteria of entering the entropy stage.
Already the Shanghai Composite Index has declined below the conservative downside target of 4,012.56. The July 23, 2015 upside failure coincided with the ascending conservative target. This is the first true test of weakness in the upside move. The next move in the price to the downside should confirm the downside move or indicate the ongoing battle between buyers and sellers. The point indicated as the critical support will reveal the overall short-term direction of the index. Although the move up or down is academic, it is the size of the move that will be most fascinating as we believe it will be massive.
Because the Shanghai Composite Index has a history of parabolic rises and subsequent crashes, our guess is that declining to the 1,722.12 level should be expected. In addition, if the SSE were to replicate the previous rise and fall in the period from 2005 to 2008, the index could drop as low as 1,447.37.
In the past month, gold and gold stocks have been on a rollercoaster ride. Gold declined as much as –4.59% while gold stocks, as represented by the Philadelphia Gold and Silver Stock Index (XAU), declined –17.88%.
Although there has been a recovery of sorts, we cannot be sure that the decline is over.
On May 19, 2015, we did a downside review of Green Mountain Coffee Roasters (GMCR) based on the work of Edson Gould. At the time, GMCR was trading at $88.69. Our downside assessment was as follows:
“As can be seen above, the price of GMCR has declined below the conservative and mid-range downside targets of $110.08 and $81.40. The acceleration of the current decline seems to indicate that achieving the $52.71 extreme downside target is very likely.”
On August 6, 2015, GMCR declined as low as $52.40. This falls well within the indications that were provided by Gould’s Speed Resistance Lines [SRL] at $52.71. We closed our downside assessment of GMCR with the following comment:
“The fact that GMCR is prone to extreme moves up and down suggests that the extreme downside target is the point at which to start assessing risk and accumulating shares.”
Now that GMCR has fallen below the extreme downside target of $52.71, we think now is the time to review GMCR as a going concern for a potential transaction.
Assuming that an investor is willing to accept total loss of funds, now is a great time to review the fundamentals of GMCR and determine if it will survive on its own or ultimately get acquired. Below is the updated SRL based on the work of Edson Gould.
Our best guess is that buying GMCR in three stages on the way down is the most “prudent” approach. For those interested in the stock but don’t like the prospect of catching a falling knife, we’ve outlined three potential starting points for investment at $40.66, $31.33 and $23.04. We’d suggest investments of 50%, 25% and 25% of allotted funds.
Again, this recommendation is not for the faint of heart. Additionally, it is safest to assume all money put to this stock are a total loss and requires a significant amount of due diligence before any commitment is made. From a historical standpoint, a retest of the prior low ($17.25) is not unusual.