2) The second feature is the ban on short selling. A very limited number of stocks are available for short selling. The vast majority cannot be short sold. This means that the only way to make money is on the long side – buy low and sell high. Profits only come from rising prices so it makes sense to sell and sell quickly when the market begins to fall. It makes sense to sell and sell even more desperately when losses start to mount. This increases the volatility of the market and the speed of market falls.
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3) The third feature is the limited trading hours in the Shanghai market. Demand is confined to these four hours in total. When trading time is limited it easy for desperation to set in. It propels bull markets but it also propels falling markets. Longer trading hours remove the need to act quickly and emotionally.
4) The fourth feature is the suspension of thousands of stocks from trading. Nothing is guaranteed to induce panic selling more quickly. Investors fear that they will be locked out of the market so they rush to sell at any price. It becomes the same psychology as a run on the banks.
These four features all combine to distort the smooth operation of buyer and seller supply and demand. The result is very fast uptrends and very fast downtrends.
Of course these discussions beg the questions: where will the fall stop and when to re-enter the market? From a technical perspective we look for consolidation between 3000 and 3400.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders – www.guppytraders.com. He is a regular guest on CNBC Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.