Confluence and Fibonacci Levels to Watch in China Shanghai Index

Dec 10, 2010: 2:46 PM CST

I’ve had a few requests to keep up with China’s Shanghai Stock Exchange Index, and indeed it’s trapped right now between two key confluence levels which make for an interesting chart picture.

Let’s start with the Daily Chart, note the key levels, then move to the pure Fibonacci Confluence Retracement Chart for additional clues, and finally top it off with a look at the Weekly EMA levels to watch in the week(s) ahead.

First, the $SSEC Daily Standard Chart:

I find it really interesting when price ‘respects’ key moving averages – and in all charts I use the 20 and 50 EMAs with the 200 SMA.

What’s happening now – as we’ll soon see in the weekly chart – is that a confluence resistance barrier is forming on the daily chart (shorter frame) at the 2,870 level while these same EMAs are forming confluence support on the weekly (longer) chart at 2,800.

It’s no surprise then that the price is trapped right now between those key reference levels:  2,800 as support and 2,875 as resistance.

As always, ONE of those levels has to break, which should produce a break-out style move and allow for a potential low-risk trade to play the breakout when confirmed/triggered.

From a price purism standpoint, these levels are referenced S/R levels from the consolidation rectangle that has formed since mid-November to present.

Let’s now turn off the moving averages and look at two short-term Fibonacci Retracement grids from prior lows:

The Blue Fibonacci Grid starts off the July low at 2,319 and ends at the November high at 3,186.  The two key levels to watch include the 38.2% Retracement at 2,855 and the 50% level at 2,753.

Price gave a spooky spike down to 2,750 at the end of November and then bounced off the level there, leaving it as a reference.

Beyond the intermediate Blue grid, I drew a smaller retracement grid from the August and September lows at the 2,567 level – also to the November high.

This grid reveals the 50% line at 2,876 (resistance) and the 61.8% level at 2,803 (support).

With a few exceptions of little spikes outside the green lines, the price has stayed within these boundaries.

I like to simplify prices to make it easier to remember, so again we can round the upper level of confluence to the 2,875 level (as shown above) and then the lower level down to 2,800.

Magic, right?  No – they’re just levels to watch for reference.

With those daily chart levels established as important (2,800 and 2,875), let’s now get a final glimpse at what the weekly chart reveals.

Without getting too complex, I just wanted to show first the two converging (blue) trendlines connecting past swing highs and swing lows.  Those come into play – also – at 2,800 and 2,875.

But perhaps the more imoportant reference is the dual crossing of the 20/50 EMAs at the 2,810 level as seen above, and the (so far) three weekly little doji candles off this confluence support region – at 2,800.

So, the going thought is that support is likely to hold, but of course be prepared to guard or position/re-position on a firm downside break under 2,800.

Otherwise, the index is still in a short-term rectangle range with resistance at 2,875.  To make it easy, you could use the simple levels 2,800 (key support) and 2,900 (key resistance) and determine what to do/whether to act or not in the event one of these levels firmly breaks.

As always, keep watching the charts for objective price evidence and don’t let bias get in the way – if possible!

Corey Rosenbloom, CMT
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