"The above ETF, which is a good proxy for mainland China shares, not only had a key week reversal last week but also moved below its 200 wma. It also has been in a continuous downtrend since its top in the week ending 8 May 2009.

"Does this imply that the Chinese stock market correction still has some distance to go before it bottoms out?"

Eoin Treacy's view Thank you for this email which allows me to clarify a number of points. I agree that the Morgan Stanley A-Share Fund has been a reasonable proxy for the Shanghai A-Shares Index since it debuted in late 2006. However, funds also have associated costs so it will tend to underperform the stock market index more often than not.

Before going any farther, let's first review the chart facts. The fund topped out near $45 in September 2007 and posted a progression of lower rally highs before accelerating to a low near $15 by October 2008. It then rallied impressively to around $35 by May 2009 and has been broadly ranging mostly between $27 and $35 since.

When you talk about the fund being in a continuous downtrend since May 2009, this would appear to be a question of perspective. If you look at a daily chart of the last year, I can understand how you would identify the progression of lower highs from May to relatively recently. However, we need to look at as much back history as possible in order to get an idea of where we are in the overall market cycle. The longer-term chart suggests that the bottom was in October 2008.

You correctly identify the weekly key reversal characteristics. However this occurred within a relatively lengthy ranging phase rather than following a major advance or decline so the effect is not as emphatic. Perhaps more importantly, this is an upward dynamic which is a bullish signal.

We define moving averages as trend smoothing devices that lag by definition and tend to use the 200-day moving average (MA) more as a corroborating tool rather than a sacrosanct level. A price breaking slightly below the MA for a few days, or even weeks, before rallying back above it is normal trading activity; particularly in trends punctuated by extensive ranging. What we are looking for is for the instrument to find support in the region of the MA and that the MA continues to ascend.

CAF's moving average turned upwards from February 2009 and the fund has found support in the region of the MA on a number of occasions in the last few months. It rallied from it again last week. To me at least, the chart bottomed in October 2008 and the entire 7+ month range, from the May high, looks like a period of accumulation. A sustained move below $25 would be required to question potential for an eventual successful upward break.