M2 upsurge 'will boost' Shanghai's securities index

Markets overreact to old news, particularly when it catches them by surprise. The slowdown in the national economy is old news. The relaxation of restrictions on bank loans and improving funding for small and medium enterprises is old news. The March lending rise is consistent with the policy easing and support that have been signaled by the central government from the beginning of this year.

The central bank has cut reserve requirements for more bank branches to help boost rural credit. Foreign-exchange reserves rose from $3.18 trillion at the end of December. The increase in foreign-currency holdings shows capital is returning to China. It's a long-term vote of confidence.

Despite all these old news stories, the growth in the M2 figure caught many commentators, and particularly Western observers, by surprise. The old news had a surprising twist, and this is also reflected in the short-term movements on the Shanghai Index.

The very rapid rebound from 2246 on March 30 is a very strong rally, but it was driven by the unexpected news and this makes the rally unsustainable in the short term. It takes more than just good figures from one month to turn around an index.

Investors can expect to see some consolidation in the index around 2350 near the rally peak. There is a strong probability of a continuation of the downward trend in the short term. However, this downward trend continuation is part of a longer term pattern of broad market consolidation that precedes the development of a sustainable longer-term trend.

The current situation on the Shanghai Index is defined by three support resistance levels. The lowest support/resistance is near 2000. The upper support/resistance is near 2460. The central area support/resistance is near 2300. The 2300 level has been a strong and consistent support/resistance level starting in 2011 October.

This long-term market consolidation behavior is seen clearly on the weekly index chart that shows several years of index activity. The weekly chart also shows that the 2012 March rise to 2440 is the first part of a breakout test of the long-term Guppy Multiple Moving Averages group of averages. This breakout pattern of test and retest is the normal behavior that develops before a sustainable long-term trend breakout.

The current rally on M2 growth is a news reaction, but in the longer term it signals a further relaxation of monetary policy that will drive growth and an increase in the Shanghai index.

The author is a well-known international financial technical analysis expert.