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Shanghai Composite Index Starts 2020 in a Bullish Sprint, Inverse H&S

Chinese stock markets are starting the year in a bullish sprint. On the final day of 2019, the Shanghai composite index triggered a 245-days old inverse head and shoulders pattern, and the pattern suggests that the Shanghai composite might add another 8% from today’s level to reach its target of 3329.24.

Read our Best Trading Ideas for 2020.

Phase One Deal Might Be Concluded, China Central Bank Pumps Money into the System

We have seen similar patterns been triggered in several stock markets over the last few months, but the Chinese stock market indices have been lagging as trade war concerns loomed, and the Chinese economy has been slowing down. However, with stock markets worldwide turning higher over the last few months and President Trump announcing that the “Phase one deal” will being signed in the next few weeks, it looks like buyers are piling into the Shanghai stock index.

The Chinese central bank is also adding momentum to the buying spree by pumping $115bn into the economy. In what appears to be a surprise move given the market’s reaction, the central bank reduced the reserve requirement ratio for Chinese commercial lenders by 50 basis points, and this released approximately $115bn into the system.  Also adding to the upbeat mood is China’s official manufacturing index, holding steady at 50.2 in December, which is above the 50 boom-and-bust-threshold.

Technically, the inverse head and shoulders index had a 287.58 points difference between the “head” low at 2757, and the neckline, on August 15. If we add the 287.58 points difference to the breakout point level on December 31, it generates a target of 3329.24, and about a 9.5% price rise. This pattern will remain in play as long as the index trades above the December 23 low, and I suspect that buyers will meet corrections towards the breakout point around 3041.