Can this tell us about future price action?

CHINA FINANCIAL - In Brief 30 Jul 2015 by Michael Pettis

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If this model is appropriate (i.e. if enough investors believe that there is a consensus around brokers selling substantially once the index breaks 4,500), there are two obvious implications. First, if Beijing wants the market to keep rising, it must either convince investors that brokers will not sell at 4,500 or it must engineer enough very visible buying that it can convince investors that buyers will bulldoze the market right through 4,500, absorbing any potential selling without a care. Brute force, in other words, is again what is needed. Second, once the Shanghai Composite breaks through 4,500 convincingly, the market will rise very sharply before it hits its next barrier. Why? Because the existence of the implied call option means that demand “normally” would have pulled the index above 4,500, and was only prevented from doing so by the implied call itself. What is more, the closer the market gets to 4,500, the greater the gap between the current price of the index and the price at which the index would have traded had the implied call not existed. Once the call is “cancelled”, the gap will disappear, and the market will surge. But this is all wild speculation on my part. My main point is that the structure of investment strategies in the Chinese stock markets had always guaranteed that this would be a brutally volatile market that trades almost exclusively on “the consensus about the consensus”, and therefore prices will reflect very rapid shifts in this consensus, in exactly the way Keynes explained in his description of beauty contest strategies. The market’s mood will rise or fall rapidly, buffeted on the one hand by “brute force” buying and on the other by...