Courtesy of Doug Short.
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The Shanghai Composite Index looks to be creating a multi-year descending triangle pattern. A little over 50% of the time the asset that forms this pattern, ends up falling in price. When support breaks, over 75% of the time a meaningful decline takes place. For more details on this pattern, see this reference.
The pattern suggests that if support breaks, the decline is the size of the high to low of the descending triangle. With this in mind, the pattern would suggest a 30%+ decline in this index if support is taken out. See the target of the pattern in the chart below.
A breakdown has not taken place at this time. I just wanted to give you a heads up on this pattern for a country that represents one sixth of the world’s population. If the Shanghai Index would happen to fall 30%, do you think it could spill over into other important stock markets around the world?
So far the poor performance of the Shanghai Index has had little impact on the stock markets around the world, as many are at or near all-time highs. It could pay to keep one eye on what the Shanghai Index does in the next few months, in case support would fail to hold!
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