Skip to main content

The Prelude to the Great Bull Market Has Not Yet Truly Begun

Stock market movements appear complex but do follow discernible patterns. This rally, which has already extended for two years, is technically quite simple. To explain clearly, we must first reveal a historical pattern of the Shanghai Composite Index. For simplicity, I'll use monthly time windows only.

In May 1992, the Shanghai Composite reached its first historical high of 1429. All subsequent historical highs are closely related to that point and that time.

In February 1993, the historic top of 1558 precisely touched the resistance line ascending from 1429 at a rate of 180 points per year, or 15 points per month. That month, the line stood at 1429 + 15 x 9 = 1564.

In June 2001, the historic top of 2245 precisely touched the resistance line ascending from 1429 at a rate of 90 points per year, or 7.5 points per month. That month, the line stood at 1429 + 109 x 7.5 = 2246.5. Both of these historic tops are the most important peaks in Shanghai Composite history, and both are highly correlated with resistance lines ascending from 1429 at certain rates. This clearly cannot be dismissed as mere coincidence. Some may ask whether these rates are set arbitrarily. The answer is no.

As is well known, a full circle is 360 degrees, which forms the analytical foundation. Using a baseline of 360 points of rise per day, the related resistance line rates are constituted by proportions of 1/4, 1/2, 3/4, and so on. Clearly, in the two examples above, the resistance line rates are constituted by 1/2 and 1/4 respectively.

From this, it is not hard to understand that the consolidation below 3000 since January 2007 was nothing more than a strong pullback following the breakout above the 1/4 line. In March, that line stood at 1429 + 178 x 7.5 = 2764. After the January-to-March correction, the breakout above this line was confirmed as valid in early March, while the so-called "2.27" crash merely constituted the final retrace confirmation of this line. The massive rally that followed was technically self-evident — simply the logical assault on the 1/2 line after the 1/4 breakout was confirmed. It was only the ignorant bears, completely unaware, who staged the farce of attempting to go short at 2700.

In May 2007, the 1/2 line stands at 1429 + 180 x 15 = 4129. This level has powerful technical significance. From a time perspective, 1429 has equally important historical patterns. The gap between 1558 and 1429 was 9 months; the gap between 2245 and 1429 was 9 years; and this May marks 180 months since 1429 — half of 360 — an extremely important time window, after which it would be impossible for nothing to happen.

From a purely technical standpoint, whether the 1/2 line can be effectively broken is the true litmus test for this great bull market. Failure to effectively break this line would mean the operating pattern constrained by the 1/2 resistance line for over a decade continues. Put another way, the stock market's rise over these two years has been extremely moderate — a recovery-type rally guided by the inherent historical rate of stock market operation, nothing to be alarmed about. In a sense, only a true effective breakout of the 1/2 line would signal the true beginning of a transformative great bull market; otherwise, it's merely a repetition of the old rhythm, speed, and model.

Therefore, whether this line can be effectively broken constitutes the true test for the bulls, while the bears will inevitably use it as a bastion for their counterattack. The battle around this line will constitute the first truly heavyweight bull-bear showdown in two years — a grand showdown that will determine whether the market adopts a new or old model. There are only three possible outcomes:

  1. The market stalls before the line or forms a bull trap above it, creating a major top;

  2. The market breaks through the line and consolidates strongly around it — similar to the post-1/4-breakout consolidation of January-March — then seeks to break higher;

  3. The market breaks through powerfully and moves far above the line, then uses a strong pullback to confirm the breakout, before launching an assault on the 3/4 line, currently positioned at 1429 + 270 x 15 = 5479.

Regardless of which path the market chooses, the breakout, retest, and confirmation of this line will require at least 3 months. Therefore, at least until July, this line will dominate the broad market's trajectory. As for which path the market ultimately takes, there is no need to predict. All market movements are the resultant of all participants' forces — no God predetermines anything. The market's choice manifests in real time through its price action. With sufficient understanding of intraday and sub-daily movement patterns, it is not difficult to detect these choices in advance.

Regardless of the market's ultimate choice, it will constitute but a small segment of the super bull market. This 1/2 line is the watershed between old and new models. Once this line — which has controlled the market for over a decade at a rate of 180 points per year — is effectively broken, it can be converted into the most solid base of support for subsequent market development. A breakout is only a matter of time, and the more solid the foundation, the more beneficial for market development.

(Special Senior Advisor to this publication, Mu Zi)