China is on the verge of breaking out from its pattern of consolidation, at least according to the monthly chart book from the analytics team at Bank of America Merrill Lynch.

Source: Bank of America Merrill Lynch
Source: Bank of America Merrill Lynch

If you look at the chart above you can see that the Shanghai Composite Index is in the midst of transitioning into an upward trend. Stephen Suttmeier, a technical research analyst at Bank of America Merrill Lynch, notes that we've reached the end of a five year downtrend and are set up for a breakout.

The two periods highlighted in the chart appear to be similar -- each lasts about four years. The one-year rally following the prior breakout gained 300 percent, though I doubt anyone at Merrill is looking for another rebound of that magnitude.

Technical analysis textbooks suggest that the value at the start of the wedge is the initial upside target for any subsequent breakout. In this case, it argues for a move back to its August 2009 level of 3,477. That would be a gain of 55 percent from the most recent closing price.

To contact the author of this article: Barry Ritholtz at britholtz3@bloomberg.net.

To contact the editor responsible for this article: Alex Bruns at abruns@bloomberg.net.