Shanghai equities may continue to head lower early this week with a short-term market trend hinging on whether blue chips regain momentum and oversold shares win favor from bargain hunters after losses last week.

Analysts noted companies with solid profit growth potential are on track to come back under the spotlight as Chinese listed firms are set to announce interim financial results this month and next.

The Shanghai Composite Index, which covers yuan-denominated A shares and hard currency B chips, slumped 6.6 percent last week to end Friday at 3,820.70, the lowest since June 6, when it tumbled to 3,776.32.

Turnover in Shanghai amounted to 638.4 billion yuan (US$87.5 billion) on the week with only 107.2 billion yuan on Friday, compared with 906.8 billion yuan one week earlier, suggesting sentiment was lackluster.

"The weak scenario has yet to change after recent drops and we advise investors to stay on safe turf when turnover is low," said Zhang Li, a Huatai Securities Co analyst, who estimated the index could go as low as 3,400.

Last week,a 4.03-percent decline on Thursday and a 2.39-percent loss on Friday were largely due to concerns over government moves to mop up bulging liquidity and other austerity measures, including interest-rate hikes.

China's top legislature last week reviewed and approved a proposal that might eventually lead to reduction in tax on interest in bank savings accounts. It also looked at 1.55 trillion yuan in treasury-bond sales to buy foreign exchange for overseas investment.

"The market seemed to overreact to the news, which had been known about for a long time and some investors might have used the timing to realize profits," said Liu Yu, an Orient Securities Co trader. "It's hard to predict where the market will go concerning policy uncertainties."