A Purely Technical Outlook for Future Market Movement

Author: [Site Administrator]
Source: [Fund Analysis]
Article type: Regular article
Published: 2008-4-18 19:14:29
Column: Expert Perspectives

Recently the market has been oscillating back and forth around the 3424 level identified by this column, sustaining this for quite some time. In recent days, the movement has turned sharply downward. Since the current fundamentals are completely unsupportive, a rally with real momentum has been unable to truly emerge, maintaining only a weak oscillating pattern. This oscillation must ultimately resolve in one of two ways: either gradually strengthening through oscillation before seeking an upside breakout, or simply smashing out a bear trap with a sharp decline followed by a quick rebound back to the oscillation platform to build strength.

Regardless of which path the market ultimately takes, in fundamental terms both ultimately mean launching new price action from the current platform as a base. This common ground actually demonstrates the technical significance of the current platform. What needs exploring now is the magnitude of the rally that will ultimately emerge after this platform is confirmed, because in the strictest technical analysis, three possible trajectory variations exist.

From 6124, the Shanghai Composite has produced two technically significant rebounds of different magnitudes. The first-tier rebound was the so-called cross-year rally from 4778 to 5524. The second-tier rebound was the battle around the annual moving average, specifically the range from 4196 to 4695. Therefore, the three possible variations are: 1) a second-tier magnitude rebound; 2) a first-tier magnitude rebound; 3) a rebound exceeding first-tier magnitude.

Obviously, these three types of rebounds are progressively larger in magnitude. The weakest is the first scenario. Since the decline from 4695 is already entering its end stage, at minimum, a first-scenario rebound should follow. Given the current fundamentals, where the government has effectively become hostage to the so-called CPI obsession, the probability that the capital market is ultimately treated as a sacrificial lamb is extremely high. If this fundamental backdrop continues to hold, the probability of only a first-scenario rebound is very high.

That is to say, we may initially see only a first-scenario rebound, after which further decline to create new lows remains necessary. Only after those new lows are created does the market have the possibility of producing second- or third-scenario movement. As for this new low ultimately appearing in the 2500-2700 range or even lower — none of that would be too surprising.

In fact, I've stated clearly before: the Shanghai Composite's trajectory can be fully referenced against the Shenzhen Component Index's historical pattern. The reason we were able to identify the major top at 6100 in advance last year was, beyond the Shanghai Composite's own analysis, the important fact that the Shenzhen Component Index had already produced a historical movement from just below 1000 to 6100 in 1996-1997 — a movement with extremely high probability of matching this round of the Shanghai index. And in fact, this match ultimately became reality.

The Shenzhen Component Index's historical trajectory showed a rapid retreat from 6100 to below 3000, and this round of the Shanghai index has again produced a strikingly similar indicative pattern. Therefore, the Shanghai Composite ultimately breaking below 3000 is entirely reasonable from the standpoint of this historical pattern comparison.

Of course, historical pattern comparisons don't always hold perfectly, but from the current situation, the probability of ultimate confirmation is growing. This time especially, the fundamental backdrop is exactly the same as last time: last time it was the so-called Asian Financial Crisis, with the government responding by sacrificing the capital market. This time it's the so-called subprime mortgage crisis — in both cases, external factors triggered internal pressure, with the final policy choice being to sacrifice the capital market. So all of this becomes quite easy to understand.

Note: to understand the current capital market, you must thoroughly grasp the inevitability that the capital market will ultimately be treated as a sacrificial lamb in the government's final decision-making calculus. This inevitability has been analyzed in detail previously and is the key to understanding the current capital market.

From the current fundamentals, a third-scenario outcome seems unlikely, though a second-scenario possibility still exists. Last time, the Shenzhen market required two years of correction before a third-scenario movement appeared. If you believe in history, then a third-scenario movement would require at least one year.

Of course, analysis inherently involves prediction, and there is no possibility of 100% accuracy. Actual trading must always be based on the market's ultimate choice. Analysis and prediction cannot be treated as the market's actual movement — the latter is the only true basis for trading decisions.