The Western analysis focus is on growth slowdown in China and its associated metrics, such as official and unofficial purchasing managers index figures. Official National Bureau of Statistics and China Federation of Logistics and Purchasing May PMI figures show a relatively high level of 55.2, while HSBC PMI figures show 48.7 for May.
The more significant figures are not the monthly PMI or the results of the planned slowdown in the economy. The most significant figure is 18 percent. That's the rate of growth in Chinese wages in the last 10 years. In Shanghai it is 14 percent, Beijing 21 percent, Shenzhen 20 percent and Guangdong 18.2 percent just in 2011. William Fung, head of Hong Kong's Li and Fung, predicts overall China's wages will increase 80 percent over the next five years
With more money in their pockets and the certainty of more to come, people begin to change their spending and consumption habits. It's a powerful and sustainable change than underpins economic stability. In China the increase in wages provides the fuel for a consumer-led recovery. The growth of domestic consumption and an increased demand for imported goods provide the foundation for sustainable economic growth. It is beginning to show up in the Shanghai index behavior.
The Shanghai index developed a sustained rally rebound from the Monday, May 21, 2330 low point. On Tuesday, May 29, the index closed above the value of the short side 1*ATR (average true range) indicator. The index also closed above the value of the count-back line indicators.
The change from rebound from 2330 to a change in the direction of the trend is confirmed using two measures of market volatility. The first measure of volatility is the 1*ATR indicator. The current value of the short side 1*ATR is 2384. The close above 2384 is evidence of a new upward rally.
The second measure of volatility is the count-back line calculation. The count-back line is calculated from the lowest low in the current downward trend and is used to help identify when the rebound becomes a genuine rally. The calculation uses three higher highs to set the value of the count-back line. The current CBL value is 2378. The close above this level is also evidence of a new upward rally.
The upward rally is not always a smooth rise. These two volatility indicators also help to decide if any index retreat is consistent with a continuation of the new rising trend. They help to define the acceptable range of volatility in the new rising trend.
The first measure of this acceptable limit of volatility in the rising trend comes from the 1*ATR indicator applied from the long side. The calculation starts with the May 21 low. The current value of the long side 1*ATR is 2347. This means that if the Shanghai index closes below 2374 then the new upward trend has failed. While the index value remains above 2374 it means that the new rally upward-trend breakout is continuing.
The close above the value of the short side 1*ATR signals an upward trend breakout. A continued close above the value of the long side 1*ATR confirms the upward trend breakout is continuing.
The second measure of the acceptable limits of the trend comes from the count-back line calculation used as a trailing stop-loss signal. The calculation starts from the highest high in the current upward trend. The calculation uses three lower lows to set the value of the count-back top loss line. The current CBL value is 2358. This means that if the Shanghai index closes below 2358 then the new upward trend has failed. While the index value remains above 2358 it means that the new rally upward-trend breakout is continuing.
When investors use two volatility measurements they use them as a warning signal and a confirmation signal. In the current situation the CBL value is higher than the long side 1*ATR value. A close below the CBL value at 2358 is a warning signal of upward trend weakness. Investors will prepare to exit trades.
A close below the long side 1*ATR value at 2347 confirms the upward trend has failed. Investors will take action to exit their trades.
These volatility indicators are the most effective way to understand rally and trend activity in the current market environment because the market has developed a very wide consolidation pattern behavior. The lower edge of the consolidation pattern is near 2660. The upper edge of the consolidation pattern is near 2460.
In the short term - one to six weeks - the Shanghai index offers many short-term rally trading opportunities with rebound rallies toward resistance near 2460. This behavior is part of a market reversal from a long-term downward trend to a long-term upward trend.
The author is a well-known international financial technical analysis expert.
