(Bloomberg) -- China’s Shanghai Composite Index may resume its rally through the next two weeks before encountering a so-called resistance level at 3,150, according to an Elliot Wave analysis by DMG & Partners Securities Pte. The benchmark stock index peaked at 3,478 during trade on Aug. 4, then began a two-week decline before the gauge found “buying support” at 2,761, the intra-day low on Aug. 19, the brokerage said. That correction completed the fourth part of the five-phase Elliot Wave cycle, DMG said. The gauge last traded at 2,946.40.“The 2,761 support won’t be violated,” James Lim, a Singapore-based analyst at DMG & Partners, said in a telephone interview yesterday. “This rally is now at wave five, which could last for another two weeks before it touches the immediate resistance at 3,150.”
The Elliot Wave principle is based on a theory developed by accountant Ralph Nelson Elliott during the Great Depression. He concluded that market swings, or waves, follow a predictable, five-stage structure of three steps forward, two steps back.
In addition, the waves share a variety of features: Wave two never falls below the starting level of wave one; wave three is never the shortest; waves one and five tend to be of equal length; and wave sizes are often related by a series of numbers known as the Fibonacci sequence, wherein each number is based on the sum of the two previous ones.Lim wrote in an Aug. 11 report that the formation of a “double top” -- made up of two consecutive peaks that are approximately equal with a moderate trough between them -- signaled losses for the Shanghai Composite Index. The measure has fallen 9.8 percent since then.The Chinese gauge is the worst performing index so far in August among 89 benchmarks tracked globally by Bloomberg.
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