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End of 2007: Trend Analysis Under the Capital-Policy Game

2007/9/17 0:41:48

This rally, starting from mid-2005, has been strictly controlled by the series of proportional lines originating from the 1429-point level of 1992. For example, below 3000 points, what was being oscillation-confirmed was the 1/4 line, which also left the mark of the February 27th crash. Above 4000 points, the oscillation confirmed the 1/2 line, which, right within May's 180-month grand cycle, used the May 30th crash to continue verifying the effectiveness of these proportional lines in controlling market trends. The current market trend likewise has not departed from the control of this series of proportional lines.

In September, the 2/3 line's position is at 1429 + 184 × 30 × 2/3 = 5109; the 3/4 line's position is at 1429 + 184 × 30 × 3/4 = 5569. Clearly, the September 11th crash was a pullback test after breaking through the 2/3 line. But whether that line will ultimately be firmly established typically requires a confirmation period of three months or more, which was perfectly verified during the confirmations of the 1/4 and 1/2 lines.

Since the 2/3 and 3/4 lines are quite close together, future price action will be simultaneously controlled and confirmed by both lines. Because this month is the closing month for the third-quarter candlestick, as long as this month's close cannot land above the 3/4 line, it can be stated with certainty that the final close of 2007 will be constrained by the 3/4 line. That is to say, even if the year-end close ultimately breaks above the 3/4 line, there will inevitably be at least one episode similar to the February 27th, May 30th, or September 11th crashes along the way.

It can be stated with considerable certainty that, according to the alternation principle — February 27th was a minor correction, May 30th 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 violent as the May 30th type. Based on September's close relative to the 2/3 line, market trends can be classified: if the close is above that line, the market is in a strong position; otherwise, it is weak. The absolute magnitude of its strength or weakness is proportional to the distance of the close from the 2/3 line.

The simplest is often the most convenient and most powerful — in analyzing and operating on market trends, the same holds true. In technical analysis, nothing is simpler than the moving average system. Yet in mid-to-long-term 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 May 30th crash. Any price action below the 5-month MA has ultimately proven to be a bear trap.

But such a pattern will inevitably be broken someday, and the moment it breaks will mark the confirmed beginning of a major-level correction. Note: this correction's level will certainly be greater than that of May 30th — meaning it will be the largest correction since the rally launched in mid-2005. Conversely, before the 5-month MA is effectively broken, the market's rally continues.

Due to the consecutive monthly long bullish candles in July and August, the 5-month MA has severely lagged behind and currently remains below 4600. Therefore, September's oscillation is technically a wait for the 5-month MA to catch up. Consequently, the fourth quarter's trend boils down to just one question: once the 5-month MA has moved up, can the market continue to hold above it? In other words, will the trend continue to be propelled by the upward momentum of the 5-month MA?

From a short-to-mid-term perspective, the 5-week MA is critically important. Once it is effectively broken, a correction at least as severe as the May 30th type becomes unavoidable. According to the alternation principle, since the May 30th crash traded space for time, the next correction of similar magnitude has a very high probability of trading time for space. Of course, this judgment's premise is that the market has not been affected by particularly exceptional non-systematic factors.

Since last year's market gain was 130.43%, closing at 2675.47 points, at a corresponding ratio, 6165 becomes a benchmark level for this year. Additionally, the Shenzhen Component Index in its 1996 rally also briefly dipped below 1000 before launching, just as the Shanghai index did this time. The former ultimately topped out above 6100, making the 6100 vicinity a particularly noteworthy level for the latter's rally.

From a perspective favorable to market development, the most rational and ideal trend for the year would be: first, September closes above the 2/3 line; second, the fourth quarter uses the third quarter's long bullish candle as a base for oscillating consolidation, with the oscillation range forming a hub centered around the 2/3 to 3/4 line zone, ultimately closing with a doji or small candle.

But once policy-side pressure exceeds a reasonable range, the market will evolve into a pressured trend — September's close falls below the 2/3 line, and the fourth quarter ultimately closes with a medium-to-large bearish candle. Such a trend would inevitably leave a long upper shadow on the annual candlestick, significantly constraining next year's upside potential. Conversely, once capital-side excess surpasses a reasonable range, the market will evolve into a frenzied trend — forcibly breaking through the aforementioned 6100 zone within this year. In that case, a correction exceeding the May 30th level becomes nearly unavoidable.

Currently, the capital side and policy side are gradually moving toward balance. Once this balance is irrationally disrupted by either side, it will create unnecessary difficulties for the mid-to-long-term development of China's capital markets. The game between capital and policy is an eternal theme in the history of capital market development — not just in China, but worldwide. If this game can unfold within the bounds of maximum rationality and systematicness, it would be the greatest blessing for the development of China's capital markets.