Image source: Visual China
There is a "saying" in the stock market: a long market must fall. This is also written in many books on technical analysis. But at the same time, some books on technical analysis say that after consolidation, most of them follow the original trend. This is another embarrassing point in technical analysis, with contradictory statements. As can be seen in the figure below, in the trend of the Shenzhen Component Index in 2022, the situation after the first consolidation area from the left is "follow the original trend after consolidation", but the latter three are all "long market must fall". In the same year, the trend after consolidation was very different.
Figure 1: Shenzhen Composite refers to the daily candlestick chart in 2022. Source: Securities Trading Software
Friends who are familiar with the situation in 2022 know that at the beginning of that year, due to the epidemic in Shanghai, the stock market plummeted. By the end of April, the epidemic situation in Shanghai eased, market confidence recovered, and the stock market began to rebound. The first consolidation area from the left is just a consolidation formed by frightened retail investors taking advantage of the rally. As the shock of the epidemic in Shanghai has passed, the stock market continues to rebound. By early July, the epidemic prevention and control measures continued to tighten, the market confidence was insufficient, and many institutions in the second and third consolidation areas sold off a lot, and the result was that "the market will fall for a long time". By mid-October, the world-renowned 20th Party Congress was held, investors were looking forward to favorable policies, and the stock market began to build a bottom. After the meeting, rumors were to introduce epidemic prevention and control optimization measures, and by November 17, 20 national optimization measures were promulgated, which was exhausted and the market declined. From November 28, it is rumored that further epidemic prevention and optimization measures will be introduced, and the stock market has risen again. On December 7, the State Council promulgated the new ten articles, which were very strong, and the market continued to rise. But as the pandemic spread much faster than almost everyone expected, markets were hit. By the end of December, the peak of the pandemic had finally passed and the market began to rise again.
It can be seen that whether the stock market will "fall for a long time" or "follow the original trend after consolidation" depends on the fundamentals at that time, and also depends on the general trend. If an upward or downward trend has been formed and the fundamentals support an upward or downward trend, then in general, it is indeed "following the original trend after consolidation". But if the market is at the end of the rally or the upper edge of the box finishing, then it will still be "bound to fall for a long time". Of course, at the bottom of the decline or the bottom of the box, it will "rise for a long time". Especially when the box is sorted, once the market is sideways on the upper or lower edge of the box, it will definitely turn up or down.
It is worth noting that most of the tops of A-shares after the sharp rise are relatively steep, and there are relatively few cases of consolidation and heading. However, from the end of 2000 to the beginning of 2001, October 2007, and the second half of 2021, there was also a long-term consolidation, and then a sharp decline began. In a big bull market, in general, the consolidation is followed by the original trend. But if it has risen very high or for a long time, especially if management starts to warn that retail investors are crazy and the market is starting to consolidate for a long time, then be careful. It is worth noting that the consolidation at the top is very different from the bottom consolidation, and the consolidation at the top is often violently volatile. But the bottom consolidation, generally at the beginning of the amplitude is large, but then it will become smaller and smaller, especially before the upward breakout, will become relatively flat, that is, we talked about the average adhesion situation earlier.
Figure 2: Shenzhen Cheng refers to the consolidation of the top and bottom of the previous times. Source: Securities Trading Software
After summarizing the historical data, let's look at the current situation. Now A-shares are undoubtedly in a lower position, undergoing box or channel sorting, and have begun to consolidate slightly. Of course, some technical analysts believe that this is a large rising wedge, and it will continue to fall after the correction.
Figure 3: The recent Shenzhen Cheng refers to the consolidation of the daily candlestick. Source: Securities Trading Software
Is it an upward or downward breakout after this consolidation? This requires a combination of technical and fundamental analysis. However, the fundamentals obviously do not support the continued decline, the epidemic has quickly passed, foreign capital is buying wildly every day, the government continues to release liquidity, and investment confidence has recovered. At present, the only thing that worries investors is whether there will be a second wave of epidemic peaks during the Spring Festival. This is indeed possible, but this year's returnees left early, college students basically went home before New Year's Day, most of the migrant workers have also gone home, and many white-collar workers have also gone back in recent days, so far, it has not caused a large-scale infection. Of course, it cannot be ruled out that there is no possibility of a second wave of the epidemic, coupled with the pressure of consumption cashing out before the Spring Festival, and the possibility of adjusting again in the rising channel before the festival is very large. However, after the festival peak, coupled with the Spring Festival effect, there is a high possibility of breaking through this channel upward. (Fortune Chinese Network)
Note: This article only represents the views of the author and does not represent the position of Fortune Chinese. The content of the article is for informational purposes only and does not constitute investment advice.
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