Late 2007 Market Analysis

Author: [Mu Zi]
Source: [Fund Analysis]
Article type: Regular article
Published: 2007-9-14 19:00:16
Column: Expert Perspectives

This rally, which began in mid-2005, has been strictly controlled by the series of proportional lines originating from the 1992 high of 1429. For example, below 3000, the oscillation confirmed the 1/4 line, leaving the imprint of the 2.27 crash. Above 4000, the oscillation confirmed the 1/2 line, occurring precisely within the 180-month major cycle in May, with the 5.30 crash continuing to validate the effectiveness of these proportional lines' control over market movement. The current broad market movement has likewise not departed from this series of proportional lines.

In September, the 2/3 line stands at 1429 + 184 x 30 x 2/3 = 5109; the 3/4 line stands at 1429 + 184 x 30 x 3/4 = 5569. Clearly, the 9/11 sharp decline was a retrace after breaking through the 2/3 line. But whether this line is ultimately held effectively generally requires a confirmation period of more than 3 months — as perfectly verified in the confirmations of the 1/4 and 1/2 lines.

Since the 2/3 and 3/4 lines are very close to each other, future market movement will be controlled and confirmed by both lines simultaneously. Since this month is the closing month for the Q3 K-line, as long as September's close cannot clear above the 3/4 line, it can be said with certainty that 2007's final close will be constrained by the 3/4 line. That is, even if the annual closing position ultimately breaks above the 3/4 line, there will necessarily be at least one movement similar to 2.27, 5.30, or 9.11 in between.

It can be said with considerable certainty that, based on the alternation principle — 2.27 was a minor correction and 5.30 was a major correction — if the correction targeting the 2/3 line is a minor one, then the correction targeting the 3/4 line has a very high probability of being at least as severe as the 5.30 movement. Based on September's close relative to the 2/3 line, market movement can be classified: if the close is above the line, the market is strong; otherwise, weak. The absolute degree of strength or weakness is proportional to the closing distance from the 2/3 line.

The simplest is often the most convenient and powerful. In market analysis and trading, the same applies. In technical analysis, nothing is simpler than a moving average system, yet in medium-to-long-cycle analysis, a single 5-month or 5-week moving average is more effective than the vast majority of complex systems. Since the rally launched in mid-2005, the market has never effectively broken below the 5-month moving average — not even during the 5.30 crash. Every instance of price action below the 5-month MA ultimately proved to be a bear trap.

But such a pattern must eventually be broken, and the moment it breaks will be the confirmed beginning of a major-level correction. Note: this correction's level must be greater than 5.30's — it will be the largest correction since the mid-2005 rally began. Conversely, until the 5-month MA is effectively broken, the market rally continues.

Due to the consecutive long bullish monthly candles in July and August, the 5-month MA has diverged severely and currently remains below 4600. Therefore, September's oscillation is, technically, waiting for the 5-month MA to catch up. Thus, Q4's movement ultimately comes down to one question: once the 5-month MA moves up, can the market continue to hold above it? That is: will the rally continue to be carried by the 5-month MA's upward inertia?

From a short-to-medium-term perspective, the 5-week MA is extremely important. Once it is effectively broken, a 5.30-level correction becomes unavoidable. Based on the alternation principle, since 5.30 was a space-for-time exchange, the next correction of similar magnitude has a very high probability of being a time-for-space exchange. Of course, the premise for this judgment is that the market has not been affected by special non-systemic factors.

Since last year's market gain was 130.43%, with a close at 2675.47 points, by corresponding proportion, 6165 becomes a benchmark point for this year. Furthermore, the Shenzhen Component Index in its 1996 rally — much like this round of the Shanghai index — also slightly broke below 1000 before launching, and the former ultimately topped at 6100. Therefore, the 6100 area is a position deserving special attention for the latter.

From the standpoint of what's beneficial for market development, the most rational and ideal trajectory for the market within the year would be: 1) September closes above the 2/3 line; 2) Q4 uses Q3's long bullish candle as a base for oscillating consolidation, with the oscillation range centered on the 2/3-to-3/4-line zone, ultimately closing with a doji or small bearish/bullish candle.

But if policy-side pressure exceeds reasonable bounds, the market will evolve into a pressured trajectory — September closing below the 2/3 line, with Q4 ultimately producing a medium-to-large bearish candle. Such a trajectory would necessarily leave a long upper shadow on the annual K-line, significantly suppressing the space for next year's rally development. Conversely, if the capital side's rampaging exceeds reasonable bounds, the market will evolve into a frenetic trajectory — forcibly breaking through the 6100 zone within this year. In that case, a correction exceeding the 5.30 level becomes difficult to avoid.

Currently, the capital side and the policy side are gradually approaching equilibrium. If this equilibrium is irrationally broken by either side, it will create unnecessary difficulties for the medium-to-long-term development of China's capital market. The contest between capital and policy is an eternal theme not only in China but in the history of world capital markets. If this contest can unfold within the maximum possible bounds of rationality and systemicity, it would be the greatest blessing for China's capital market development.

(Special Senior Advisor to this publication, Mu Zi)