Out of all the absurd things I never expected to see, this ranks pretty high. The China data dump which was all according to the best of efforts, had an enormous impact (Shanghai Composite +3%!) and in a matter of a few days the entire playing field for the Hong Kong markets seem to have gotten technically reversed. Below I will outline why my second fortune cookie of the year seems like a valid breakthrough. Good cup of coffee recommended for this read.
First, the downwards trend line on the triangle held well. Impressive, and it indicates a rather early test of what can happen later on. Sure, the triangle was very thin and had to bleed out sooner or later, but here’s a few other rubs that seem bullish.
Today’s price action
Wow! Anonymous open. Dip down deep towards the bottom of the range for 10 trading days. Back up. Finish with the highest close since December 7th – one calendar month! With increasing volumes! Futures are also up higher, and we are now on the low end of the 18 800 – 19 200 resistance cloud. Triangle broken, retested, and technicals in the rear view mirror (which are only driven by the fundamentals of the data from China today) looking increasingly bullish.
Navigating rough seas
If we look back on some of these technicals, I would like to present two charts, one medium term – 3 years, and one rather short term – 6 months. Each of the sub charts hold rather important information, which will be accordingly dealt with. First, look on the top chart, preferably 6 months. Notice the falling 126 day SMA (half-year) and the interaction between the monthly, 21 day, and quarterly, 63 day ditto.
The falling 126D is around 19 400… so any guesses that this will provide the trial by fire for the HSI at the 19 200 level? Doesn’t seem outlandish. Wait for potential breaks above 19 200 intra day, and see if they manage to produce strong price action into the moving average (wicks are your enemy pretty much). The prior top in early december is also bull-repellant, so watch carefully as it’s a resistance line getting enforced by a momentum indicator after having braved a triangle top trend which was not doneon either a strong trend or in a very convincing fashion.
Next is the 21D and 63D. 21D will be rising in a matter of a day or two (definitely by the end of the week) likely setting up the staging of crossing the 63D in bullish fashion. However, keep an eye out as any sustained rally will pretty much have to pull the 63 day up, which will require breaking above 19 500 by early February. The question is then how much more juice is left in this rally car, and whether that will be enough to overcome the significant resistances around 20 200, which has been a very important level since it was taken out in mid-August.
MACD + RSI double teaming for a rather interesting signal
Both anonymous, very close to their neutral levels both of them (positive EMA divergence on the MACD although the actual measure is negative) and 50+ RSI. Reading out, momentum is slowly turning positive from somewhat lower levels. More importantly, both of them have made higher bottoms which are lending strength to this uplift of momentum. This is also in agreement with price action, and perhaps most importantly of all, the MACD level was rebounded when it came close to its own EMA, lifting it successively higher. Trend is dead, but watch it rise from the ashes! There needs to be a rather impressive fall in the market to negate the work done so far and “rewind” both these indicators back to the fall price action, but that said, both of them are in rather sensitive positions near the neutral levels. Positive muddle through potentially spotted, so don’t be too aggressive.
DMI trend is nowhere to be seen
Read: trading opportunity. No clear direction, which will take time to build up, but this is particularly where the options trades either way are rather cheap if you’re trailing momentum, and the momentum indicators indicate rather weak but positive momentum that could build. very strategy dependent, but given Hong Kong’s high beta spread and the gems you can find either way on both the positive side and the negative side of 1, especially if you look into smaller caps and Chinese equity, it is rather likely that these plays have been sold off rather good as well to play it more defensively on larger caps. Strategy dependent, but a great timing tool.
Which you will need because of this baby! The equity return is on? Look at how smoothly that thing lifts off! Still from a low level, but today was the first bullish trading day above the monthly SMA for volume since 1st of December, and there are only two more candles included above the MA in that period! This is a pattern that repeats strongly throughout the last 6 months, with swiftly declining volumes, and this looks like a good break from that. Slightly artificial, but at these levels with thick resistances and price multiples in the doldrums, I’ll take that! (November has 5 trading days with volume above the VSMA, and then September and October has 7 and 8 respectively, with heavy tilt down.)
Given that the HSI is fairly international, and governed by cash inflow outflows to a high extent (check volume vs. index levels and trends), be rather careful with the volume measurements. Given the shorter term trend upwards, and the break of the VSMA being bullish, things might be good for the next few days. Fingers crossed for Merkozy managing to fool markets for a few days. Prompt exit recommended after this week though: Chinese New Years is knocking on the door, and that means volume down!
Please use the 3-year chart above to trail the volume movements with the index. I think you’ll like what you’ll see.
Stochastics hiding a gem. Overbought?
Use the three-year chart for this. Question: How many times has the Stochastics passed above the 70 line… and fallen back without the Stochastics surging significantly higher within 10 days? I found 5, but one of them was the fall 2009 Dubai day crash, which fell so low that it kinda poisoned the well technically, and another was the US ratings downgrade in August. So: 3 valid, and one of them occurred this fall. There is then the slight problem with some other breaks not being very strong in price action (stochastics fall back because the bottom range is shrinking in, not because there is a significant new high) but that accounts for roughly 1/3 of the breaks by my count. Given the fall/winter failure to break, plus the other technical things in favor of upwards momentum, I would say that the total picture is one worth trading long! 500-1000 points even if ranges aren’t broken and new trends are established, stronger without prior bullish trend! 25 occurrences, including this one, and 5 failures to break another 500 points minimum – at least 79% accuracy for what is 2.65 easy percent in the HSI with a near 4:1 win:neutral even if you calculate conservatively.
The bias? This pretty much counts 10 occurrences during the QE1 rally of 2009. Percentages of success (but not necessarily profitability – there were quite a few good rallies in the last 2 years) drops pretty dramatically if those are filtered away. Again, this time, for at least a week, the stars seem aligned though and trend is dead. High volume up on eurohopes, low volume during Chinese new years leadup, and a volume reentry rally into spring? I can definitely see this happening. Not saying things will look rosy in March (cough, Greece, cough, troika) but the momentum could be with China indices and the question is if the capital flows then won’t start favoring HSI over S&P.
What’s in the playbook then?
Just pretty much look at the third fortune cookie I presented for new years. Financials look great. ICBC in particular today just crushed the lines drawn for it, parked itself near the highs after swining through the lows, and better yet played off the 63D SMA and 126D SMA in a way that kinda makes me want it to marry me. Low volumes, but the big run at the end of the day had all of it! Widely same patterns as the HSI, but intermediate target at 5 flat, and longer term hopes for a push towards 5.3.
Bank of China (3988) had the highest close in nearly 4 months… just saying… it’s been taking a beating, but up 3%+ isn’t bad still! Holdouts waiting for triangle breakouts to happen might want to check out Agricultural Bank (1288) as well. Minsheng Bank (1988) provides more safety and perhaps the biggest support/resistance of all time. Might wanna hedge by shorting HKEx (388), since it broke the conservative triangle line, still leaving the riskier trend line highly live. Given this however, and the power of the falling trend line, I’d still hold off.
Gambling is still a good bet. Again, go back to the fortune cookie. These will require a bit more waiting though, and will be a great opportunity to enter after the Chinese new years if the momentum holds. Nothing new to report.
Financials are the game at the moment, and you can take pretty much whatever pick you like. Go for it!