On the one hand…
Three weeks ago the Shanghai Composite (SSEC) broke out from a multi-year bullish wedge formation. Wedges imply a minimum move back to the start of the wedge which, in this case, would mean an advance to over 3,000 – a 36% rally! Whoo-hoo! A recent spike in volume, however, warns of a short-term top and the better play is to wait until a pullback has completed.

Figure 1

On the other hand…
The old saying about a bull in a China shop alludes to the fact that things can get broken easily. That could include those who are bullish Chinese equities, too. I like to think that a breakout from horizontal resistance can be used to confirm a breakout like this. In the above chart that level is at 2,267. But the chart I’m going to be watching equally closely is the relative performance chart of SSEC versus the S&P 500 (figure 2). When this chart moves upward it means China is outperforming the US and vice versa. As the chart shows, SSEC has been underperforming the S&P for over five years. In addition to a breakout on the absolute price chart (above) I want to see relative performance break its long downtrend before getting long China.
Figure 2

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Ed Carlson, author of George Lindsay and the Art of Technical Analysis, and his new book, George Lindsay's An Aid to Timing is an independent trader, consultant, and Chartered Market Technician (CMT) based in Seattle. Carlson manages the website Seattle Technical Advisors.com, where he publishes daily and weekly commentary. He spent twenty years as a stockbroker and holds an M.B.A. from Wichita State University.

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