Shanghai's SSECI dropped 5.5%

In September last year, I had noted that SSECI was looking very toppish (go here). In January this year, we had seen the confirmation of a downtrend in SSECI (go here). Since then, SSECI had been sliding. In the past few days, SSECI found some support at around the 3300-3400 level & staged a rebound. This rebound appeared quite promising, despite the negative background news of anti-Chinese Tibetan protests. Today's selloff, resulting in a 5.5%-drop in SSECI, has raised concern that the bear market in SSECI might have more downside.

From the chart below, we can see that the immediate support for SSECI is at 3400 level, and thereafter at the important psychological 3000 level. The immediate resistance is at 3900 level, and thereafter at 4300 level.


Chart: SSECI's 2-year chart up to April 7th (from Yahoo Finance)

SSECI has risen from a low of 1000 in July 2005 to a high of 6000 in October 2007. That's a gain of 5000 points over 27 months. In just 5 months, SSECI has given back (or, retraced) 2600 points or, 43%. In a normal retracement, a stock or index may give back 33% to 66% of its prior gain. While SSECI's retracement to date has been very sharp, it still falls within the normal range.

In addition to the price retracement, there is also the time factor to take into consideration. 5 months is too short a time to fully correct the excesses of a 27-month bull run. Thus, I believe the SSECI's current bear run may still have more time on the clock.

Assuming that SSECI were to retrace 66% of its prior gain, it could hit a low of 2700 level. This means that SSECI's further downside could be another 20% from here. I believe that there is a good possibility that the SSECI could have a decent counter-trend rally, coinciding with the Beijing 2008 Olympic, which is only 4 months & 9 days away. A strong rebound in SSECI will benefit the Hong Kong stock market as well as some of the CWs of HKEX-listed companies traded in our market.