Shanghai Composite drops in early trade, recovery rally stalls near 61.8% Fib

• The Shanghai Composite is down 10 points or 0.4 percent in early trade.
• The recovery rally in the index ran out of steam at 2682.89 (61.8% Fib R of Sept. 26 high/Oct. 19 low).

Chinese stocks are flashing red in early trade, having gained more than 220 points in the previous two trading days.

At press time, the index is trading at 2640 - down 0.4 percent in the day.

Stepping back, stocks picked up a bid on Friday after regulators said they would take necessary measured to restore investor confidence. Further, the blue-chip index rallied more than 4 percent yesterday for its best daily performance in almost three years on news that China is preparing to overhaul its income tax law for individuals.

So far, however, the risk-on rally has not translated into CNY strength. At press time, the USD/CNY is bid at 6.94 and looks set to test the major psychological hurdle of 7.00 in the near-term.

Further, the stock market rally seems to have run out of steam at the 2682 - confluence of 61.8 percent Fib retracement and 200-hour EMA.

Technical Levels

Resistance: 2,682 (61.8% Fib + 200-hour EMA), 2,743 (Oct. 10 high resistance on the hourly chart)

Support: 2,647 (support on the hourly chart),  2,600 (psychological support)