What to Watch For When Shanghai Reopens Next Week

When the Shanghai Stock Exchange reopens next week for trading, things could get interesting. It's amazing to me that they can just close for a week like it's not a big deal. Anyway, the following chart is mostly speculation. I am really really early with some estimates that can prove to be wrong quickly next week. The point of this is really to get the mind thinking. Let's be aware of what is out there. What potentially can go right and what can go wrong?

As we have seen here since the Spring, it's China that leads us lower and it will be China that leads this US stock market higher. This analysis is very preliminary and there are more lines drawn than I typically approve of, so bear with me:

Let's begin with simple support levels. Last July, a monster rally got started in the Shanghai Composite from the same levels that the market closed before the holiday last week. Call it coincidence if you'd like, but this is the 61.8% Fibonacci retracement of the Fall 2008 lows to the summer 2009 highs. To the penny guys.

So if we roll over below these critical levels, then we should expect a test of 2060 in the Composite, and perhaps an eventual retest of the 2008 lows below 1700. If you are looking to get short stocks, or get short risk-assets, then that break is your tell. If you would like to participate in a risk-on rally and believe that the recent selling of US Treasury Bonds (like they were Dutch Tulips) continues, then you want to see the Shanghai hold on to these lows.

Now for projections (assuming support holds), 2800 looks like a good initial target. This would take us back to the July 2011 highs where we also find the declining neckline from a potential Head & Shoulders pattern. I added the 3 letters S H & S just to show that the potential is there. We won't know for a long time. If indeed this is one of those, and it is way to early to call, then the targets on the Shanghai would be somewhere around 3900-4000. But by then US Stocks would be so on fire and people would be making so much money in the stock market, than no one will remember me even writing about it.

So let's not worry so much about that now. As an American trader with thousands and thousands of American stocks to trade, I will be using the Shanghai Composite as a guide. Do I want to push the Risk-On envelope? Or back off and buy some Dutch Tulips US Treasury Bonds.

Tags: $FXI $CHINA $SSEC $PEK $EWH