Observing consolidation behavior aids prediction

Markets do not move up dramatically for extended periods. A pullback is inevitable and it's the nature of the pullback that defines the sustainability of the underlying trend. This is a significant question that applies to the Shanghai index after the powerful breakout from the resistance level near 2700.

The nature of the consolidation behavior in the Shanghai index provides some of the answers to the potential for the pullback and development of the future trend.

The most significant risk in a very fast market rise is that it is followed by a very fast fall, often taking away 70 to 80 percent of the original rise. When the fast rise develops a parabolic trend, as seen in the Dollar Index in early 2010, then the fast fall is an almost inevitable outcome. The fast rise in the Shanghai index is not a parabolic trend. It's more like taking a fast elevator from one floor to the next. The Shanghai Index floors are created by two historical consolidation areas.