I looked a little bit closer at the HSI candlestick action today. I don’t know if there is a “freefall” forecasting candle, but Friday, September 23rd looks like it.
A long-legged falling day with opening/close centered at the middle, a slight rise, and failing to enter market action of the previous day. (Click chart for full screen link.)
A few other things are also worth noting, most prominently the 19 000-level wicks, the four evening stars which all preceded lower trading (July 5th, September 1st) or precipitous falls (August 1st, September 16th), and the last five trading days’ steadily increasing volume. In total, this was an indication of how significant the 19 000 clear break (no trading action above) was. First, there are several pinbars or strong rejections off the level in early August, and the proximity to the 19 000 line is enough to stem normally very bearish candlestick patterns like a bearish candle forming off a harami where the “back” is either a marubozu bearish reversal set or the worst week since 2008, and two-and three black crows following shooting or evening stars. Then in the second week of September, the market cannot bounce off any more, rejecting three falling days with a meek near-unchanged close with a long wick down, a new pinbar which fails to break off the highs, immediately into an evening star and renewed attacks on the 19 000 line, resulting in another bullish pinbar into a bearish spinning top right on the line. After all of this, the market posts a clean break with a massive marubozu, and then one of the freefall candles I introduced with.
What are we looking at?
Summing the chart, the market is increasing volumes while we get falling monthly RSI which has yet to pass into oversold (it will be there for a while as well, most likely), increasing DMI with -ADX touching the tops of the early August falls, a Magic-D with a trend of -1000 (will discuss later) and falling, with increasing distance to the Magic-D. Although the Magic-D and volume are the things that I normally take my clues from, there is a peculiarity with strong falls that leads to one having to investigate the Stochastics as well. On these “freefall” candle days, the stochastic line cannot be at, or even very close to zero. The long legs of the market made the stochastic never really “zero out” in August, indicating that there were still buyers that were willing to go in. This plays into my earlier analysis of “ordered markets” and nearly every post tagged “panic”. But now we have a marubozu making the clean break with the 19 000 level, and a significant down day following that, with some buying, most likely by speculators, people that are forced to be invested so they shift into something safer, and plain idiots. But once you pass further down and actually squeeze those that went in and provided the incredibly strong support at 19 000, making them take unacceptable losses from a management perspective or margin perspective, there could essentially only be cascading falls. The market action wasn’t convincing enough to turn the tide either, and there was a 1.4% fall in the HSI.
Could we bounce from here? There were after all buyers on Friday and market reactions were jerky and panicky. It depends on how much capital was used to shore up the 19 000 line. If everyone went in and bought for bargain hunting, and those who didn’t transferred their cash to less volatile markets, there is essentially no risk capital left to take the ride up. Given the euro-discussions of delaying anything for 2-3 weeks, and no clear statements out so far this weekend, it seems like the Magic-D is accurate. It shows a falling average, with additional slope as of last week, and the average, which I use to read trend, is outside of -5% of the price, which is rather extreme. Even if the MACD would come up and touch/surpass average, the strong downwards trend would still hem you in and force a consolidation, which here would look like a dramatic MACD divergence jump! The divergence jumped from -400 to about 0 in August, yet only resulted in consolidation because of the trend then pulling price down, indicating the August falls were the start of a longer trend. Now, we have even stronger trend with new falls, the MACD is running lower, highly bearish candlesticks on high volume and a break of a very strong support. Be long at your own risk!
Putting numbers to it:
I am expecting a short term hemming from uncertainty, with big wicks and the market drifting lower until it touches 17 000. Here, there could either be a small jump to 18 000, but I suspect that if there is a clean break, no matter how small at 17 000, the aforementioned cascading of the 19 000 support buyers would come in and potentially push the HSI towards the 15 000 – 15 600 levels called for in my P/E-based bottom forecast. This is also more likely because earnings forecasts has the HSI at around 9.50-10 at current prices, as opposted to trailing earnings which I based my estimates off.