China's Purchasing Managers' Index rose to 55.2, the fastest rate in seven months. This suggests the economy is strong enough for policy tightening to continue. This means a further tightening on borrowing conditions. Key interest rates are expected to rise before the end of the year, putting more of a cap on property and real estate. These policies drive money into the financial market because it's the best place to get good returns on capital. It's a difficult economic management task with policy makers trying to stem the fastest inflation rate in 25 months while maintaining underlying economic growth.

These economic pressures are seen in the Shanghai index where the market is developing a small support pattern near 2800. The development of the Shanghai Index with the current long term upward trend and consolidation is very different from the index behavior between 2005 and 2007. The Shanghai index on a monthly chart shows a stronger and more stable long-term trend development.

The market developed a parabolic trend starting in 2005 and ending in 2007. The parabolic trend defines the rapid acceleration of the trend. It has two important features. The first feature is the way the parabolic trend line is used to set an end date for the upward trend. The second feature is the rapid market fall when the parabolic trend ends. Usually the fall is around 40 to 60 percent of the trend rise. The Shanghai index fall was around 70 percent.

The recovery after a collapse of a parabolic trend is difficult. Often there is a fast rebound followed by a sideways consolidation period. This behavior pattern is also seen with the NYMEX oil chart when the parabolic trend collapsed in July 2008. The Shanghai index pattern of a fast rebound in 2009 and a sideways consolidation in 2010 is similar to the pattern in the NYMEX oil market. It is the common behavior of this type of trend.

The Shanghai index has developed a consolidation between 2600 and 3300. The recent Shanghai index rally has reacted away from the 3200 level and it may possibly re-test support near 2600. This long-term consolidation is frustrating because it develops short-term upward trends and retreats.

The consolidation pattern is useful for investors. This consolidation behavior develops a base for the next upward trend breakout. The new upward trend moves at a slower pace than the fast rise seen in a parabolic trend. The new upward trend may include some fast rally upward moves and some fast retreats but these are within the framework of a more stable underlying trend.

A sustained move above 3300 has an initial upside target near 4100. This target level uses historical support and resistance levels. Another technical upside target is calculated by measuring the width of the current consolidation band and projecting this value upward from 3300. This gives a target level near 4000. The historical support and resistance level is slightly higher than this technical calculation. This suggests the market breakout will pause between 4000 and 4100.

There is a smaller potential for the market to move below 2600 support and re-test the previous low support area near 1700. This development could create a very long-term double bottom rebound pattern. This is also called a "W" reversal pattern. Currently this is a low probability development.

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