NEW YORK (TheStreet) -- China's stock market is going to head lower again. Just how much lower remains an open question, but the key will be whether the country's benchmark Shanghai Composite index can find support in the area between 2470 and 2740.
What happens to China's stock markets is now obviously a global concern. Earlier this week global markets were rocked by a fierce bout of selling, wiping out months of gains in mere minutes. The consensus is that the cause was China's recent stock market rout, which has shaved nearly 50% off overall equity valuation in the Shanghai Composite since the high earlier this year.
The Chinese government has made it very clear that it has no intention of standing idly by as the country's equity markets continue to slide. Since the start of the correction, Chinese officials have done everything in their power to stabilize prices and keep stocks propped up, but the results have not been encouraging so far. This has led many global investors to ask whether Beijing's efforts will be successful or cause further harm.
The Shanghai Composite was unable to clear the key resistance level cited in the July article, leading to further downside. With prices now bouncing off that article's targeted support of 2890, is there hope for a lasting bottom, or is this just another corrective rally before the selloff continues again?
Based on the structure of the decline off the late July high so far, it appears that another low is still needed before a significant bottom is possible.
The Shanghai Composite should meet heavy resistance between 3175 and 3385 on the current move up, capping the bounce and turning the index back down toward a target of 2740 to 2470.
Whether or not that support region holds will be key to where the Shanghai Composite is headed over the next several months.
If Chinese stocks can turn around and rally from there back above 3215, there is a very strong possibility that China's stock market correction will have concluded and a new rally phase will be set to begin. Breaking below that support region, however, would suggest that things are going to get a lot worse before they get better.
Here's a chart illustrating the technical analysis of the Shanghai Composite.
After threatening strict punishment for short selling, initiating a government-sponsored buying program and even suspending trading for a number of listed stocks, Beijing made its latest effort to stabilize China's equity markets by having the central bank make another rate cut.
The amount of government intervention and stimulus that China has been experimenting with in its markets appears unprecedented, and so far has done very little to stop stock prices from continuing to slide.
Faith among global investors in China's ability to prop up equities is starting to seriously falter, which means that positive results need to be seen very soon before all hope is extinguished, leading to increased capital outflows.
That is why the support region below between 2740 and 2470 is so important in determining whether China's stock market has a chance of stabilizing.