Suppressed volatility heading for volatility bursts for Chinese equities

China truly stands as top risk of 2015 as the current government struggles to prevent a stock market meltdown, hard landing of economy and to manage its currency in a bid to gain a seat in IMF's currency basket.

While Time will tell, weather they fail or succeed, one thing can be told with some degree of certainty that the actions by Chinese authorities likely to have greater consequence going ahead, many which might turn things uglier.

One of such can be China's equity market.

Chinese authorities are intervening in the market in order to stem a stock market crash and curb massive volatility.

At its peak 5 day average of realized volatility reached close to 10% in China's benchmark stock index, Shanghai Composite. Since the intervention it has fallen and now stands at 4% around, still quite high compared to global standard.

However the technical pattern shown in the figure is pointing at squeeze in the trading range, which might lead to a break out ahead.

Artificial suppression of volatility, might actually lead to higher volatility ahead. The pattern is likely to release volatility if gets broken, especially if it to the downside.