China's Shanghai Composite Index may be set for another "wave" of gains after completing a so-called correction that lasted for almost a year, according to Elliott Wave International Inc.
The Shanghai index capped a three-wave decline in early July and has turned higher near the 61.8 percent retracement of its 2008 to 2009 rally according to the Fibonacci sequence, the research company said. That also coincided with the lower line of the trend channel that had contained the decline from its August 2009 high.
"This confluence of pattern, price and channel support also argues that Chinese stocks have put in a significant low," the Gainesville, Georgia-based research company said in its August Asian-Pacific Financial Forecast report.
The Shanghai Composite has gained 12 percent from this year's low on July 5 amid speculation that the government will ease property curbs and allow more lending to offset a slowdown in economic growth. Even after the rebound, the measure is down 20 percent for the year, the worst performer in Asia. A correction is defined as a 10 percent decline from a recent high.
A gauge tracking small- and medium-sized companies on the Shenzhen Stock Exchange and a measure of automobile stocks have led the rebound in China, signaling that "the next impulse wave up has begun," according to the report.
The China Shenzhen Small Medium Enterprise Composite Index has jumped 17 percent from the July 5 low, while the FTSE Xinhua 600 Index's Automobile & Parts Index has gained 23 percent, outpacing the Shanghai Composite's advance.
"When stocks and sectors that led a previous rally display relative strength in a correction and then appear to take off again, it often signals that the general market's uptrend has resumed," the researcher said.
Elliott Wave Theory, created by US market analyst Ralph Elliott in 1938, attempts to predict future price moves by dividing past trends into sections, or waves, and calculating changes in value.
Fibonacci analysis is based on the theory that prices rise or fall by certain percentages after reaching a high or low. The ratios are based on the sequence pioneered by 13th century mathematician Leonardo Pisano Fibonacci and used in technical analysis to determine highs and lows for prices and predict direction.
Elsewhere in Asia, the Taiex Communications & Internet Industry Index is leading a recovery in Taiwan's Taiex index, which may rise to a minimum of 17,500, Elliott Wave International said, without giving a timeframe for its target. The Taiex gained 1.7 percent to 7,890 today, paring a yearly loss to 3.6 percent. The sub-index has climbed 15 percent in 2010.
A measure tracking metals shares on the Bombay Stock Exchange is also leading gains in India since the market's 2008 low and may form at least one more wave higher to complete its pattern, the research company also said.