Big Money

Despite my bullishness in Shanghai technical outlook I feel recent run up needs consolidation which may stretch for 2 months till end of September.
My initial target of 2600 was breached. But after looking back into weekly chart I figure out that the 2683 level provides a better price target for this run up.

A shallow 30% or at max 50% consolidation gathers more energy for further upward push.  And I feel a consolidation towards 2485 will be good for many late comers to buy back shares at cheap before strong bull rally in the final quarter this year with immediate target close to 3000 level.

The bull market rally and correction since March 2009 have started from Shanghai instead of US.
Shanghai has been taking the lead by marking the high/low points of the market and Hangseng which is the proxy to Shanghai has been dancing well to balance its move between US and its bigger neighbour.
Shanghai has bottomed and I believe, US market has completed its corrective low.

Currently Shanghai is dancing towards medium move of 3000 level with stopover around 2600 as its initial target which has been attained recently (See Shanghai hits support and bounce with target 2600)
So I believe, US market is around short term resistance level which could last till end of this month for windows dressing (I’ll reduce position substantially before this Friday).

Can Shanghai hits above 4000?
Can Shanghai cross 4000 level as I mentioned in my newsletter in early May 2010?
Through my longterm wave analysis it is possible that Shanghai to cross above 4000 level by 1Q 2011, marking a swift bull and caught anyone by surprise as happened in March 2009.
For that to happen we need Dow Jones to cross 2010 high and attain its full longerm swing at 12600 level. At this level everyone will be very bullish and it’s the top of the bull market. As long as you hear bear noises it’s unlikely that any correction becomes a bear market.

Shanghai Longterm Target

Dow Jones Longterm Target

We’re building a pattern of continual bull market.
The current decline is within the correction level. This continual bull market should see Dow breaking April high and may hit 12600 level (will update in next newsletter).

Current Dow Resistance Levels

The rebound has been sharp and we need to know the level of resistances, as any share recovery always followed by pullback.
I do expect pullback and this time it’s unlikely to break the recent low of 9600 level.

Below are the resistance levels:
1. Stocks has high chance to hold up gain till Friday’s options expiry with immediate target around 10350 level.
2. Next resistance is 150MA or around 10480 level
3. The last resistance is the previous high of 10600 level

All warfare is based on deception

Hence, when able to attack, we must seem unable;
when using our forces, we must seem inactive;
when we are near, we must make the enemy believe we are far away;
when far away, we must make him believe we are near.

Sun Tzu, The Art of War

Since my earlier posting of shooting the ducks the market seems to fool most traders by planting deceptive bear pattern before current strong rebound.
The smart money seems to understand and apply Sun Tzu’s Art of War strategy which remains useful in any war game.
In my early stage of understanding this market I have to unlearn many studies from technical analysis books. By applying TA blindly we’re fighting  a war while enemies holding our war plan.

The deception explained in the chart:

1. We have seen a deception of market breakdown below 5th Feb significant low and they are on 6th May,  25th May and 8th June. These are the levels where the amateurs are placing their stop loss orders.

2. The market heading higher to form right shoulder (Head and Shoulder formation). As many people were still bearish they could have shorted the market on its way up and finally many options are expiring on 18th June (3rd Friday of the month).  The market was forcefully held up till option expiry date despite a number of bad news. This act would force many put holders getting nothing out of their options.

3. Market immediately reversed after the options expiry date. This act will shake out many long-side holders and they have to cut loss when the bearish H&S pattern was confirmed on 20th July.

4. Once the H&S confirmed the long holders exited their position and the short started entering the market. However the short was soon fooled and were running to cover their position when Dow run up significantly on 7th/8th July.

What we saw are actions of the market against conventional technical analysis entry and exit.
So what we learn from the books or seminars are the sure way to lose money. Your chance improves if you use the TA knowledge by thinking like the smart money.

Whenever the US market made the strong gain, the price usually opened at its peak and come lower.
This is a common pattern partly due to following reasons:
- extreme eagerness to buy in order not to miss it
- short sellers are caught and need to cover the position
- smart money are pushing at higher opening price to unload the shares

So we have 3 reasons why we shall avoid buying at open whenever we see huge rise on Wallstreet.
The reverse is true when the big drop happens the price usually opened at extreme low and recover at later part of the day.

If we do like to buy after we identified a trend confirmation such as last night, it’s best to wait till the price reach equilibrium.
When the trading price stabilizes we compare the current price with opening price and when we see the current price is higher than the opening price, we see a positive price gain.
For buy-side investors it’s best only to enter stocks that are making positive price gain as it confirms the trend for the day and that may carry through the next day.
Most of other stocks are just too weak for our interest despite a positive picture in US market.

In tough market condition like now,  it’s the best time to identify the real leaders for the next run up instead of sentiment play in most stocks.
What I can obviously see is that strength in technology stocks despite the current poor  sentiment. The stocks such as Armstrong, UMS, Cheung Woh, Hi-P and Venture have been resilient enough to absorb any bad news that have been hitting the market.

- Recently that was talk of Armstrong being taken over by third party but the talk is still in progress and may take months.
- UMS has broken 2 years high and the share price is still rising
- Hi-P gained 40% in less than 3 weeks.
- Cheung Woh is trading above 52-weeks  high and it looks stronger

So instead of focusing on so many sentiment driven stocks, it’s time to get back on these few stocks that have shown their strength in poor market.

How big the rebound in Asian indices?
(see earlier posting: shanghai hits support and bounce).

Nikkei
Nikkei just hits the support this morning and it’s unlikely to breakdown before any meaningful bounce. A good bounce will see Nikkei towars 9800 level.

Straits Times
As I often mentioned to my clients I don’t see any bear through STI chart. It’s in fact a trading range and in fact it’s forming mini uptrend. Would it revisit the recent high at 3035? Possibility is there.

Hangseng
Hangseng despite trading in mild downsloping channel, its recent mini uptrend remains intact. We need to see whether it’s able to break 150MA as its immediate resistance.

But if US market continues its slide we might not be able to attain above target.

The correction in China has finally hit 2400 level target I set in early May  (see article: The correction is in China, not(yet) the US).
On 2nd July the China made a bullish reversal candle and for the last 3 trading days (2nd to 6th July) the index have been building strength.
The potential rebound could be heading towards 2600 level but the end of downtrend is not yet evident as technically the price need to form a higher low before an uptrend confirmation.

Shanghai slide is halting albeit temporary however I’m still waiting for sign of reversal in US market. As 2 major world economies try to sync their direction, there are only confusion and uncertainties. Traders can look only on shortterm basis as the real trend is not yet evident while investors could spot bargain if they’re able to find fundamentally strong stocks at current discount price.

I like these 3 stocks from technical and fundamental perspective: Osim, Hi-P and Goodpack

Shanghai Index
Shanghai is currently at the important defence line but it’s still long way to declare the bear in China is over.  In most optimistic view we may see accummulation around this level but a bull confirmation may need several weeks.
A simpler way to look at the new bull trend will be to look at the strength of index when the RSI(9) rise above 50 level and the price trades above 30 weeks MA.  And of course for that to happen the price will be forming higher higher (HH) and Lower High (LH) formation.
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The fear of market collapse is still with us and if I use chart as most of TA practitioners do, I’ll see only doom days ahead.
Just look at the chart of my earlier posting that we’re forming similiar shape of 2007 ( Are we repeating 2007? ).  The chart for major indices look terrible and nothing look positive at all. And the recent breakdown in BDI only support the idea of more doom ahead. The elliot wave practitioners mentioned that we’ve already completed the 5th wave up and the major selldown is on its way.
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