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Medium-Term Technical Analysis Outlook

2008/4/18 15:24:59

Today's market was a classic palace-storming rally. PetroChina breaking its issue price made everyone feel that what needed to happen had happened. But this notion of trying to force the regulators' hand on policy — that's obviously a bit too naive.

Since the 60-minute bottom fractal hasn't been constructed yet, the timing for short-term strikes must continue to be awaited by watching the charts.

I don't want to say much over the weekend. Let me deliver the previously promised medium-term analysis — written early this morning, posted here as a weekend gift.

Signing off, goodbye.

Recently, the market has been oscillating around the 3424-point level that this ID previously identified, sustained over a considerable period. Since the current fundamentals offer absolutely no cooperation, a rally with any real force hasn't been able to truly emerge, maintaining only a weak-market oscillation pattern. The ultimate outcome of such oscillation is inevitably one of two scenarios: either gradually oscillating stronger before finding an opportunity to break upward, or simply smashing down hard to create a bear trap — a rapid decline followed by a swift pullback, returning to this oscillation platform to build strength and advance.

Regardless of which path the market ultimately chooses, both fundamentally amount to using the current platform as the base from which to launch a new rally. This common thread actually highlights the technical significance of the current platform. What needs to be explored now is the level of the rally that will emerge once this platform is ultimately confirmed — because, strictly speaking, based on the most rigorous technical analysis, three possible scenarios still exist.

For the Shanghai index, starting from 6124 points, two technically significant rebounds of different levels have occurred. The first level was the so-called cross-year rally from 4778 to 5524 points. The second level was the battle near the annual moving average, specifically ranging from 4196 to 4695 points. Therefore, the three possible scenarios are: First, a rebound of the second level's magnitude; Second, a rebound of the first level's magnitude; Third, a rebound exceeding the first level's magnitude.

Clearly, these three rebound magnitudes are progressively greater. The weakest is the first scenario. Since the decline from 4695 points is now entering its final phase, at least a first-scenario rebound should follow. However, given current fundamentals, the government's approach to the market is completely hostage to the so-called CPI obsession. Therefore, the likelihood of the capital market being treated as the ultimate sacrificial lamb is extremely high. Should these fundamentals persist, the probability of only a first-scenario rebound becomes extremely high.

In other words, what we may first encounter is only a first-scenario rebound, after which there would still be the necessity for further decline to create a new low. Only after that new low is created could the market produce a second- or third-scenario move. As for this new low ultimately landing in the 2500-2700 range or even lower — none of that would be particularly surprising.

In fact, it has been clearly stated before that the Shanghai index's price action can be entirely referenced against the historical price action of the Shenzhen Component Index. The reason we were able to identify the major top at 6100 in advance last year, beyond the Shanghai index's own analysis, was an important factor: the Shenzhen Component Index's historical price action already showed a move from just above 1000 to 6100 during 1996-1997. The probability of that historical move corresponding to Shanghai's current move was extremely high — and indeed, that correspondence ultimately became reality.

The Shenzhen Component Index's historical action showed a rapid decline from 6100 to below 3000, which has once again served as an uncanny guide for Shanghai's trajectory. Therefore, Shanghai's eventual break below 3000 is entirely reasonable from the perspective of this noteworthy historical parallel.

Of course, historical parallels don't always hold perfectly. But from the current situation, the probability of ultimate confirmation grows ever higher. Particularly this time, the fundamental backdrop is identical to the previous episode: last time it was the so-called Asian Financial Crisis, and the government, in responding to it, could only sacrifice the capital market. This time it's the so-called subprime mortgage crisis — both are external factors triggering internal pressure, and the ultimate policy choice is once again to sacrifice the capital market. Thus, all of this becomes easy to understand.

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

From the current fundamentals, the probability of the third scenario is low, while the second scenario remains possible. Last time, Shenzhen required two years of adjustment before the third-scenario move emerged. If you trust history, then for the third scenario to materialize, at least one year of time is needed.

Of course, analysis inherently involves prediction, and there is never any 100% certainty. Actual operations must always follow the market's ultimate choices. Analysis and predictions cannot be treated as the market's actual price action — the latter is the only thing operations can truly rely upon.