Shanghai's stocks may extend its bearish trend this week on continuing weak investor sentiment as any upside for the market is limited, according to observers.

The Shanghai Composite Index slid 1.1 percent on Friday to 2,349.54 points, bringing the weekly losses to a three-month high of 2.3 percent and capping a three-week losing streak.

Shenyin & Wanguo Securities said the gauge may swing between 2,280 and 2,380 points this week.

The brokerage said that the market rally earlier this year was more a technical rebound following the overselling than a reflection that China's economy was improving because the HSBC flash Purchasing Managers' Index for March fell to a four-month low of 48.1. A reading above 50 signals expansion while anything below this level indicates contraction.

Pacific Securities cautioned the downturn in China's economy is accelerating.

The Ministry of Finance said last week the earnings of state-owned firms fell 10.9 percent annually to 363.5 billion yuan (US$57.7 billion) in the first two months of this year. The revenue growth eased to 9.9 percent from 21.5 percent in the same period a year earlier.