Ying Jianzhong: After filling the gap, why is the Shanghai Composite Index stuck at this level?

■Ying Jianzhong

After last Monday’s long bearish candle that drove prices down, the SSE Composite Index entered a consolidation phase. The first thing that most urgently needs to be filled is the large gap above at 3906 to 3955. Fortunately, this Wednesday, the bulls used the global stock markets’ buoyant green mood to fill this gap completely. Interestingly, when the bulls pushed up to 3955.94, they stopped right there, exactly at that level. What does that show? It shows that the market is being controlled by an invisible hand.

Time flies. This year’s trading on the A-share market has already covered a quarter of the way. In the just-past first quarter, after the SSE Composite Index opened, it kept rising. However, just when the bull market’s strong performance ignited market enthusiasm, the sharp adjustment at the end of the first quarter erased all the positive candles the bulls had earned, and the SSE Composite Index basically returned to the starting point from the beginning of this year.

The SSE Composite Index is currently not too far from this year’s opening level of 3986. In capital markets, bull markets can be characterized by continuously lifting things year after year—such as the index keeps setting new highs, and stays at highs of tens of thousands points, which feels great. There is also another kind of bull market: it rises, pulls back, rises again, pulls back again… The trend is full of twists and turns, with each rise being built and rebuilt after being knocked down repeatedly, yet the bottom keeps being raised each time, and the top gradually keeps climbing as well. In a market like that, if investors can keep pace with the rhythm, their returns won’t be bad. But if they step out of rhythm, losses can be severe, and it can easily throw investors’ mindset into disorder. This A-share bull market seems to be a bit similar to that.

Since the beginning of this year, the SSE Composite Index’s lowest point has been 3794. This level is much higher than last year’s trough at 3040, and both of these levels occurred during the course of the “9·24” bull market. After last Monday’s long bearish candle that drove prices down, the SSE Composite Index entered a consolidation phase. The first thing that needs to be filled is the large gap above at 3906 to 3955. If this gap can’t be filled, the daily K-line will form an isolated “island” pattern. Fortunately, this Wednesday, the bulls used the global stock markets’ buoyant green mood to fill this gap completely. Interestingly, when the bulls pushed up to 3955.94, they stopped right there, exactly at that level. What does that show? It shows that the market is being controlled by an invisible hand.

The author believes that the SSE Composite Index’s correction still needs time, so that time can be used to buy back space. After filling the large gap, the next target overhead is to reclaim the six-month moving average. After this week’s close, the six-month moving average level of the SSE Composite Index is around 3990—close to this year’s opening level. Going forward, investors can focus on the following two points in their trading.

First, pay attention to the annual reports of listed companies. By the end of April, the annual reports need to be fully released. Annual reports bring not only changes in listed companies’ performance, but also—by looking at changes in the top ten shareholders of listed companies—insights into the market’s main forces’ direction, dividend and return policies, and share capital expansion plans. This is very important reference value for stock selection.

Second, pay attention to the movements of leading companies on the STAR Market. The STAR Market is currently a key area for IPOs. From Cambrian’s shift from a “-U” unprofitable mark to the removal of that mark (removing the U), to going from initial IPO fundraising to later extremely high-price follow-on financing, and even plans to use capital reserves to cover losses—whether this series of actions will become a development model for the STAR Market’s growth tier is worth watching. Last year, Cambrian’s directed share placement was at an issue price of 1195.02 yuan, and all participants were financial institutions. On April 16 this year, its placed shares will be unlocked. As a leading company on the STAR Market, how Cambrian’s price will fluctuate at this point in time is worth watching.

The SSE Composite Index has entered a wide-range consolidation “clamped” between two rails: the upper rail is at the six-month moving average, and the lower rail is at the annual moving average. The index’s current position is closer to the upper six-month moving average, and still a bit far from the annual moving average below at 3747. But note the next two trends: first, the annual moving average will move up at a pace of 2 points per day; second, the distance between the six-month and annual moving averages will keep narrowing, but what it ultimately will choose to break through still needs to be tested with time.

The author believes that since the “9·24” bull market is being advanced in this way, the best trading strategy is to ride the waves with the market and move in step with the broader index, capturing the band-to-band price differentials.

This article was first published by the author in Financial Investment News

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