Sunday, May 9, 2010

Shanghai Composite: A Zig-Zag Correction

Shanghai Composite is in a medium-term upward correction of a long-term bear market. Evidence is in the 5-wave decline from all-time highs, which requires a ABC 3-wave correction upwards, followed by another 5-waver down. I believe we have completed wave A, and are in the B wave down, with a C up to come.

Given the 3-wave moves(within the blue B) & extended sideways behaviour over 9 months on declining volume, i proposed a triangle B wave initially. Seemed to be working out fine for months, until recently - when prices broke down through "normal" symmetrical triangle bounds. Although, a barrier triangle is still a possibility, i have changed the labelling to reflect the higher probability now - a zig zag complex correction.  

Price broke down through the suggested channel (cyan), implying more downside. Currently oversold on both daily and weekly basis, risk-reward favours the bulls in the very short-term.

Important levels to watch

Technically speaking - yes, an ABC correction can retrace the entire length of the prior advance. However, the probability of that scenario here is low, given the strength of the wave A. Here are the higher probability turn points:
  • Obvious support at the previous low of 2640. Knowing SSEC's preference to extend in the final wave of its impulsive moves, i will not rule out further downside behavior.
  • Next target would be in the 2520-2560 area (with 2560 being the 50% retrace of the A wave, and 2520 the w=y target.)
  • In the unlikely case of further downside, 2340 is the 61.8% retrace of A, close to the lower tentative channel line on the chart.
Only at the end of this current correction, can a price projection to the upside be made, but at the very least expecting a retest of the highs.

Trade Management

As you are aware, corrective waves are notorious for their unpredictability, and are an e-waver's worst nightmare. It's all about probabilities & I'm no match for them either! You want to trade markets, you gotta erase & redraw your drawing board as often as it requires. Key to success is trade management, more than knowledge of the future. Every trader has (or should have) a trading style that is unique to him/her, which suits his/her personality. I donot provide trading advice. How you manage your trade is very important, and only in your control.

All the best folks!
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