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China Flirts with a Major Breakout

Headed into the end of last year, China's Shanghai Composite Index had become significantly extended, registering an unsustainable weekly RSI above 90. At the time (see Here), we expected the index to work off its overbought condition, by churning with greater volatility as the market consolidated the massive move that began that summer.

Over the past three months, the SSEC has traded in a wide ~10 percent range, working off the overbought condition as it prepared to challenge the previous highs from 2009. While the week is still young, last night the SSEC broke above its weekly benchmark high set in the summer of 2009.

Shanghai Composite Index 2008-2015 Weekly Chart
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Taking its cue from the Shanghai, our equity ETF proxy - ASHR, made a 52 week closing high today, loosely following the consolidation range of our historic breakout pattern.

ASHR 2014 Daily Chart
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While the previous closing weekly high for the SSEC is ~3412, the daily close from August 4th, 2009 measures above to ~3471. Assuming the index continues the move higher over the short-term, similar to the breakout leg for the SPX in January 1983, it wouldn't surprise us to see the market retrace back later in the month and test the level one last time before continuing higher.

1982-1983 SPX versus 2014-2015 SSEC Daily Chart
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As a reference guide, we shifted the index marginally to match up with the breakout leg in the historic SPX comparative.

1980-1983 SPX versus 2008-2015 SSEC Weekly Chart
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Shanghai Composite Index 1980-1984 versus Today
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For further reading on this idea and concept, see:

Climbing the Great Wall of Worry in China

Taking Off in the Rain

 

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