You are going to need to keep an eye on China here. Like it or not, the Chinese have led our markets for quite some time now. After the 2007 run up and subsequent 2008 crash, the Shanghai Composite bottomed several months before the S&P 500. Moreover, after the reflex rally during the next several quarters, China topped out way back in August of 2009. While we know that the S&P did not officially top out until mid April of this year, many key stocks, such as $GS, topped out back in October of 2009.
My point is that to cavalierly dismiss inflection points in the Shanghai Composite is, at best, a misguided strategy. Despite the likes of Hugh Hendry calling for a collapse in the “super-sized” forecasts of growth in the out years of the Chinese economy, the chart of the Shanghai is indicating that a major bottom is brewing.
The daily chart, seen below, indicates that the potential inverted head and shoulders bottom is at a crucial stage. A break above the neckline would confirm the pattern, giving us a measured move target up to roughly 3,050. Note also that the right shoulder has been consolidating higher than the left shoulder, a sound indication of strength by the bulls. Also note the 50 day moving average flattening out below price, on the cusp of turning up.
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The monthly chart should give some perspective about how easily the Shanghai could move back up to the 3,000 area, yet still be within the context of a broad sideways channel after the huge moves in 2007 and 2008.
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While it would behoove the bulls to count their chickens before the inverted head and shoulder neckline cracks, if you are short China here you really need to reconsider your position on any further strength.
Umm…Bingo!