We went fishing for a bottom in the Chinese stock market last week. And we landed a monster.
The Shanghai Stock Exchange Composite Index (SSEC) exploded higher last week.
It busted out to the upside of the “falling wedge” pattern on the chart. The index closed above its 50-day moving average line for the first time since March. And, the SSEC ended the week with a gain of 4.32%.
Of course, the question now is “Now that we’ve caught the bottom, where do we go from here?”
To answer that, let’s take a look at an updated version of the chart I showed you last week…
The first move out of a falling wedge pattern often matches the size of the wedge itself. The blue dotted lines show that target was pretty much achieved on Friday. From here, if the SSEC has started a new uptrend – which I believe it has – the most likely move is back down to form a “higher low.”
Oftentimes when a stock (or index) has broken out to the upside of a falling wedge pattern, it will come back down and retest the breakout level as support. That makes the 2700 level a pretty good downside target for a pullback.
Here’s how the chart would look if things played out that way…
I’ll be looking to increase exposure to China’s stock market on a pullback towards the 2700 level because – if we take it one step further – here’s what we’ll have…
Bearish falling wedges often morph into “inverted head and shoulders” patterns. (An inverted head and shoulders is a bullish pattern that often signals the reversal from a bearish trend to a bullish trend.)
If the SSEC pulls back and finds support near the 2700 level, it will form a higher low and the right shoulder of an inverted head and shoulders pattern. The upside target for a move out of that pattern would be about 2950 on the index.
Of course, there are a lot of “ifs” in this scenario. But last week’s action in China’s stock market was strong enough to convince me a bottom is in place.
So, I like the potential for this scenario to play out. Traders should be looking to buy China on a pullback this week.
Best regards and good trading,
Jeff Clark
Reader Mailbag
Today in the mailbag, one eagle-eyed reader spots an error in Friday’s issue…
At the end of Friday’s Market Minute, you referenced Jeff Brown’s event…
The date is misstated as October 26, but when one registers it shows as September 26… May want to correct…
– Gary
Thanks for the catch, Gary. We’ve corrected the error and noted it for the record.
And as always, send in your trading questions, stories, suggestions – and corrections – right here.
Speaking of September 26…
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