Shanghai Composite Medium Term: A BULLISH Scenario

Hope you are having a enjoyable weekend so far. Re-examining the nature of the decline on the Shanghai Composite(SSEC) since Aug'09, i'm compelled to offer this BULLISH scenario medium-term. Let us first start with a longer-term chart:

The decline from its all-time high was impulsive in 5 waves. With the break of the downtrend channel, there was a sharp reversal(a 5-waver) with a blow-off top around 3400 (38% retrace). Since then, there was a sharp decline, followed by reversals up and down - essentially a sideways movement. In the long-term, we may be headed down to the lows, but in the medium-term there could be a c wave up of an a-b-c coming.

Now let's zoom in and examine the action since Aug'09.

The initial sharp move down(A) was a 3-wave move, very similar to what happened in the S&P last month (leading to my Shanghai Connection Theory). B was a 3-wave up, and C a very choppy 3-waver down so far.

A TRIANGLE in the making?

Please read through my earlier post - Elliott TRIANGLE explained - this action looks like a triangle in the making. If we break through the lower blue line to 2750 area, all bets are off & this could be something else totally different.

Very Short-Term

In early Feb, with the index reaching 2950 level, i called for a rebound in the very short term, in two postings, with a target of 3020-3050. Since then, prices have clawed back up to the 3020 level, and facing channel resistance. If we break through to the upside, resistance levels are 3050, 3150 and 3200 or wherever the upper trendline falls.. A break below the lower line may find support in the 2750 area.

Note that the "predictive" lines drawn on the chart are compressed in slope due to space constraint.

Conclusion

If the triangle scenario materialises, we're looking at a possible medium-term target of 4400 on the SSEC, with intermediate resistance at 3900. However, as prudent traders, watch both trendlines for a break either way, and place your stops. Remember, an early break below the lower trendline will cancel this scenario.

Implications for S&P500

SSEC is seemingly leading the SPX so far in behaviour by 4-5months. Elliott Wave Theory recognizes the fractal nature of markets. And since mass psychology of human beings is similar - with slight regional variations - could we expect a similar move sideways followed by higher, for SPX in the medium term? SPX has so far been exemplary in its copycat decline since Jan!

As always, correlations only work as long as they work! Mind the price action, and mind the trendlines.

Your participation and comments are most appreciated.