chao gu, China’s SSEC and stir-frying stocks

Just read an article in regard to China’s SSEC index. I quote;

"China is in the grip of stock market fever. Shares are changing hands in record numbers as first-timers pour in new money. Some are mortgaging their homes or dipping into retirement savings to finance a frenzy of trading known as "chao gu," or "stir-frying stocks."

For those of us who have been around the markets for a number years, we understand that this is how the public eventually gets hurt financially. Typically, they are the last to buy at significant tops, and the last to sell at significant bottoms. It’s an unfortunate fact life that has been repeated over and over again throughout the ages in every mania. Hopefully, this post will be read by at least some of the larger Chinese investors, and the word passed by word of mouth. We can only hope!

We have been following China’s SSEC since the bull market began in July 2005 at 998.23. Recently the SSEC crossed 4,000 for the first time ever. An extraordinary quadrupling in just under two years. We expected the SSEC to be a terrific bull market. Not only because it started late in the worldwide cycle, but also because China’s economy was growing at over 10% with very little inflation. Therefore at the start of the bull market, the SSEC seized the opportunity to catch up with the other international markets. Unfortunately, now it has surpassed the catch up mode, and moved into one that is in a blow off mode. When we first posted the charts of the SSEC in early 2006, we indicated that this stock market should be the best performing market worldwide. And it has been! It was trading around 1300 at the time, only about 30% off it’s 2005 lows. In April 2006, we even posted two special reports about the SSEC and its bull market: http://objectiveelliottwave.com/Chinabullmarket.aspx.

If you have been following this blog since April 2006. You know that we have successfully tracked every uptrend and downtrend during this Primary wave bull market. If you have not followed the blog, just use the Archive section, and review the weekly reports from that time until the present. This bull market has unfolded in a perfect five wave structure, which is nearing completion. For review I’m posting three charts: SSECmthly, SSECwkly and SSECdaily.

The SSECmthly chart illustrates that the last bull market topped in 2001 at 2245.43. A four year bear market followed into the aforementioned July 2005 lows at 998.23. This was a 56% decline, without the dangerous parabolic rise associated with this bull market. Referring to the SSECwkly chart. The rise from the July 2005 lows has unfolded in five Major waves: labeled 1 through 5. Major wave 3 subdivided into five Intermediate waves, which often occurs in bull markets. Major wave 5, which should complete Primary wave one, is still unfolding. Referring to the SSECdaily chart. Major wave 4 completed in Feb 2007 at 2542. Major wave 5 has been subdividing into five Intermediate waves, just as Major wave 3, but on a smaller scale. Just in the past three months the SSEC has gained 50%. Unheard of in most world markets, unless they are coming off a significant oversold low or in a blow off top. Since Major wave 4 was not very sold, and only took a few weeks to unfold, this is a blow off top. Since the SSEC appears to be in Intermediate wave 5, of Major wave 5, a significant correction will occur when this uptrend ends in the next few weeks. Support is at the low of Major wave 4: 2542. From the current levels, a correction of this magnitude represents a 38% decline. Which is certainly not abnormal for this type of bull market. However, a decline of this nature will almost certainly wipe out many of the new investors entering the market today.

Unfortunately, as we know, this is how markets function. OEW analysis was successful in determining an excellent entry point, only a little over a year ago, before the SSEC more than tripled. Now that OEW is indicating a significant top is near. Hopefully, many will wait until the end of this correction before entering this market. It does not appear, that the bull market will end on the upcoming correction. But it does appear to be prudent to sidestep a potential 38% correction before committing more funds, or investing for the first time. For now, the trend is still rising. But it should turn within weeks, if not days. Caution is warranted at current levels, not speculation.

If you are reading this in China, please translate and pass this around as a free public service.