Shanghai's SSEC index testing its uptrend line

Shanghai's SSECI is again at its medium-term uptrend line ('SS') support of 3150. In fact, it was below that support marginally (at 3137) as at 12.36am ET. If a recovery above the uptrend line does not come quickly, we can expect severe correction ahead. See Chart 1 below.


Chart 1: SSEC's daily chart as at 20/1/2010 (Source: Stockcharts.com)

The Hong Kong market tracks the Shanghai market quite closely. We can see that Hang Seng Index is taking the shape of a rounding top, with strong horizontal support at 21000. As at 12.35am ET, it is down 123 points to 21163. See Chart 2 below.


Chart 2: HSI's daily chart as at 20/1/2010 (Source: Stockcharts.com)

While the US markets remain in an uptrend, there are some signs that the upside may be quite limited (see Chart 3). These include:

1) The American Association Of Individual Investors (AAII) compiles a chart of Bearish % which indicates individual investor bears as a percentage of the total. The AAII Bearish % remains 2 standard deviations away from its one-year average, something that has led to trouble in the past (see Chart 4 below).
2) As pointed out by Jeffrey Saut in his latest message dated Jan 19, "the number of stocks above their 10-day moving averages (DMAs) continues to shrink, which is the type of action typically seen preceding a stock market correction. Also, the 25-day put/call ratios are at levels consistent with short-term negative conditions, while Friday's close left the SPX below its recent reaction lows, not to mention below its 10-DMA".


Chart 3: DJIA's daily chart as at 20/1/2010 (Source: Stockcharts.com)


Chart 4: AAII's Bearish % as at Jan 7, 2010 (Source: SentimenTrader)

Based on the above, we have to be more cautious in the market. From my observation over the past few days, the anticipated CNY rally may be running out of steam. Instead of a broad base rally, the market is only serving up fairly random, short & sharp rallies, which are quickly followed by equally sharp correction.