China has the dubious distinction of being the second worst performing stock market this year behind Greece; the Shanghai Composite has fallen a whopping 26 percent so far.
Chris Carolan, editor of Elliott Wave International's Asian-Pacific Short Term Update, has been keeping his readers abreast of the price movements in the Shanghai Composite while giving them in-depth analysis of where it might be headed next.
In the June 3 issue, he suggested that an Elliott wave pattern called "triangle" was unfolding in the Shanghai Composite, with clear bearish implications:
"The three-wave nature of the move up from the May low suggests that Minuette wave iv now unfolding may be a triangle."
-- Chris Carolan, The Asian-Pacific Short Term Update, June 3.
Why was this pattern significant? Prechter and Frost's Elliott Wave Principle says that, "In the stock market, when a triangle occurs in the fourth wave position, wave five is sometimes swift and travels approximately the distance of the widest part of the triangle."
As you can see in the chart of the Shanghai Composite above, the triangle developed throughout June. On June 29, it was complete, and prices broke swiftly downward -- just as expected. The June 29 Asian-Pacific Short Term Update said:
"We’ve talked about the triangle in Chinese equities for weeks. That triangle is now officially complete and the…wave to the downside has begun. Prices have already made new lows for the year in this decline and reached the lower Keltner channel on the daily chart."
Wave analysis is not a crystal ball since it deals with future probabilities, not certainties. But, as you see from this example, the model can give you stunningly accurate forecasts.
What's next for the Shanghai Composite? The same analysis that predicted China's current decline can help you anticipate where it's headed next. Put Charles H. Dow Award-winning analyst Chris Carolan to work for you with in-depth, chart-filled updates three times a week with The Asian-Pacific Short Term Update. Click here to learn more.