Chinese stocks are screaming higher.
The Shanghai Stock Exchange Composite Index (the “SSEC”) – China’s version of the Dow Jones Industrial Average – hit a new 52-week high on Friday.[ad#Google Adsense 336×280-IA]It’s now trading at its highest level in nearly four years.
It’s up more than 40% since I told you about Chinese stocks back in May.
Traders who took my advice to buy are sitting on big gains.
And there are likely larger gains ahead.
But after such a big run-up in a short amount of time, the SSEC is likely to suffer a brief pullback…
Take a look at this long-term chart of the SSEC…
In July, the SSEC broke out of a long-term consolidating-wedge pattern (the blue lines). The index was trading at around 2,100 back then. It then began a terrific rally.
In October, the SSEC was poised to break above its first resistance line at about 2,500.
Once it can get above 2,500, there’s a lot of room for China’s market to move even higher. The next resistance level is all the way up at 3,100.
As you can see on the chart, the SSEC is now rapidly approaching the 3,100 target. The index is up almost 50% for the year. If the SSEC can break above 3,100, it brings the 3,500 resistance level into play. So I’m bullish on China in the long term.
But we’re likely to see a pullback in the short term.
Based on the look of the one-year chart, there are reasons to suspect the SSEC won’t break above the 3,100 level on the first attempt. Take a look…
After the near-vertical move of the past two weeks, China’s stock market is overbought. The SSEC is 17% above its 50-day moving average (DMA) line. The index rarely stretches more than 10% above or below this line before coming back to test it as support or resistance. So China’s market may be due for a breather soon.
Also, the 14-day relative strength index (RSI) is in overbought territory. The RSI helps measure overbought and oversold conditions. Any move above 70 indicates an overbought condition. The 14-day RSI is currently above 92 – the highest reading of the year.
The 14-day RSI pushed into overbought territory two previous times this year (marked by the blue arrows on the chart). Both times, the SSEC chopped around for about a month, worked off the overbought condition, and gave the 50-DMA line time to move up closer to the price of the index.
With the SSEC extended to the upside, overbought, and approaching resistance, it’s reasonable to expect at least a pause in the rally – if not a more significant pullback.
If you jumped into the Chinese market on any of my previous recommendations, now is the time to tighten up your stops or take some profits off the table.
If the SSEC does start to pull back, the first level of support is at 2,500 (which lines up with the 50-DMA line). That will be the place to get back into the trade. And if you missed out on the move in China this year, this will offer a lower-risk chance to hop into the trade.
Best regards and good trading,
Source: Growth Stock Wire