2008 Market Outlook

Author: [Site Administrator]
Source: [Fund Analysis]
Article type: Regular article
Published: 2007-12-22 14:56:09
Column: Expert Perspectives

The final article of this column for the year cannot avoid the convention of offering an outlook for next year's market. This year, our column's grasp of the broad market has been quite accurate — whether it was the 180-month time cycle in May, the top at 6100, or the first landing point of the correction at the 120-day moving average, all were identified in advance.

However, describing next year's market with complete precision will be even more difficult. Below, I can only offer some boundary-defining analysis from a purely technical perspective.

Looking at this year's annual K-line, since there are still a few trading days remaining, the final closing position of the annual K-line cannot be fully confirmed, but the annual K-line will leave a relatively long upper shadow — this point should not change much. Similarly, the real body of the annual K-line will also be quite long. Therefore, for next year's movement, the annual K-line's upper shadow tip at 6124 and the midpoint of the K-line's real body (currently around 3800) will respectively form the upper and lower edges of next year's most critical large trading range.

The current market position is roughly at the midpoint of this range. Dividing this range into four equal parts, the secondary support and resistance levels are approximately at 4355 and 5555 respectively.

It can be asserted that even after breaking through 6124, the probability of next year breaking through 6124 plus the full width of this range — roughly 8400 — will be extremely small. Even if this ultimately occurs, it will certainly be a massive bull trap leading to enormous disaster. Similarly, dividing the original range width into four equal parts, one can calculate the sequential resistance levels after breaking through 6124.

Since the final annual close hasn't come in yet, precise calculations can wait until this year's close, but the methodology is the same.

From the daily moving average system, the 250-day line will be the most critical level next year. Previous articles have already stated that the first foot of this correction will land at the 120-day line, so the second foot is very likely to be at the 250-day line. Next year, there will be at least two tests of the 250-day line. It is highly likely that the first will be a comedy and the second a tragedy.

The probability of next year's annual K-line ultimately being a large bullish candle is not great. The probability of a doji or near-doji small bearish or small bullish candle is extremely high. In either case, what demands the most attention next year is the bull trap created by the annual K-line's upper shadow. Of course, one should also pay attention to the bear trap created by the annual K-line's lower shadow. If combined with index futures, next year's traps will be numerous — both bulls and bears will have a hard time. Once someone falls into a well, the consequences will certainly be more severe than this time's small well at 6124.

I won't analyze the monthly K-line in detail. Here I'll only analyze next year's quarterly K-lines. Since this quarter's K-line is basically set, next year's Q1 K-line will be the most important. If that K-line's low is lower than this quarter's K-line low, and the market cannot immediately create a new high above 6124, then a top divergence pattern on the quarterly chart will be formed. After that, during the subsequent three quarters, the 5-quarter moving average will become the most important line. Once effectively broken below, the consequences will be quite serious — the subsequent correction pressure will be far greater than that from 6124.

Therefore, the 5-quarter moving average is the lifeline for bulls next year, just as the 5-month moving average has been for bulls over the past two years.

Next year, the most ideal trajectory would be: decline first, then rally, then decline again. Of course, in finer detail, it could also be: small rally first, then decline, then big rally, then big decline. It will be very difficult to see another one-sided trend like the past two years. The most important matter for the first half of next year is what form the correction from 6124 ultimately takes. Based on comprehensive judgment, a large platform pattern and large triangle pattern have the greatest probability, though the possibility of the first stage forming a zigzag pattern still exists.

Next year, at least two tops must be watched for: first, the top constructed by the second upward leg of the 6124 correction — this is a small top; second, the large top manufactured after breaking through 6124. Three bottoms to watch: the bottoms of the first and third sub-waves of the decline from 6124, and the bottom formed after the first leg of selling following the large top. Of course, if a large triangle correction comes first, there will be an additional small top and small bottom to watch.

Additionally, in the luckiest scenario for bulls, the bottom of the first sub-wave from 6124 may be completed by the end of this year, but this does not affect the overall chart trajectory analysis.

Regarding individual stocks, next year will be a year of hot themes. All kinds of themes will emerge endlessly. The index may not offer much profit (index futures aside), but if one can ride the rhythm of theme rotation, next year's returns won't be any less than this year's. However, the corresponding operational difficulty will sharply increase.

It can be asserted that next year, the probability that more than two-thirds of stocks will produce annual bearish K-lines or extra-long upper shadow K-lines is extremely high. Stocks that can stay bullish from the beginning to the end of the year will be extremely rare. Most stocks will prepare various pits of varying depth for investors. The most fashionable behavior in the stock market next year will be falling into pits. The only suspense is: how many consecutive pits can the most audacious investor fall into?

Of course, pits come in both bull and bear varieties, but next year's bull traps will be more popular. If this year's most popular Chinese character is "rise" (涨), next year's most popular will be "pit" (井). Next year's investment market will feature four types of people: 1) pit diggers; 2) pit fallers; 3) those who accidentally fall into their own pits while digging; 4) those who vigorously pump water by exploiting different pits. The question is: which type will you become?

Besides opportunities from existing instruments, the biggest possibilities next year will likely be the ChiNext board and index futures. It can be certain that if it's a fully rational decision, ChiNext must come before index futures. Since this column has always opposed the premature launch of index futures, and next year features such a significant conference, index futures are absolutely unsuitable for launch next year. Otherwise, once they trigger major index turbulence, the impact would be unbearable. From a prudent standpoint, next year will likely only see ChiNext, with index futures remaining futures rather than becoming reality.

Therefore, the index next year may well face this variable: once index futures cannot be launched, and if the severity of policy tightening continues to increase or external markets experience another mega-quake, then the possibility that 6124 is not broken next year — or is barely broken before falling into a bull trap — absolutely cannot be ruled out.

Of course, such a pessimistic scenario can only be held as a possible option for now, but it's one that must be guarded against. In summary, above 6124, traps will increasingly outnumber opportunities. The higher one goes, the greater the chance of falling into a pit.

From the perspective of long-term capital market development, the policy this column most hopes for next year is the return of stamp duty to its original level. The stamp duty issue is the most fundamental transaction cost issue of the market. Whether a suitable equilibrium point between market trajectory and policy can be found next year to resolve this issue is, from the standpoint of long-term capital market development, the most noteworthy question.

In summary, next year's market will be vastly different from the past two years. Some of the successful experiences and habits from these two years may very well become poison next year. Whether one can adjust mentality in time and adopt more practical, flexible operational strategies will determine ultimate success or failure next year.