Xiao Long Bao dumplings are very juicy and if held carefully when picked up with the chopsticks will explode in your mouth rather than creating a mess right on the table. Thus, it will fit very well with the week’s technical theme – carefully, precisely applied pressure wins the game. My main serving is the Hang Seng Index:
Lets start with the daily candle stick action:
As usual, all charts courtesy of CMC Markets. Please also refer to aastocks for volume data and opening-hours data: CMC uses pre- and post market data. Most importantly for this discussion, the market close of the HSI was 22 030, above the gap.
- The first point of note is the gap level highlighted. It has been a very important level, indicating the early November massive wick, and has largely attracted price action for 6 days straight.
- Second, this week’s close completes the “hook” in price action as it closes above the small peak in a continued rally formed by a small draw down. This is a highly bullish pattern and indicates rally continuation along with the MACD. And all the hook price action was related to the gap!
- Third, the manner in which the hook bottom was made. It was a rejection of the 21 day SMA, and not of the more important 21 Day EMA. The candle stick was a pin bar doji with a negative wick to boot! There is more discussion on the implications of this doji later.
- Fourth, we are crossing the structural trend line previously discussed. We are thus allowed to hunt for higher targets, where I will outline them later to the extent that the trend lines in the linked analysis and the P/E and HSI point estimates needs backing up. The core of the analysis is still in that post.
- Fifth, the ADX/DMI and my special MACD methodology has been flaring bullishly since November 22nd. MACD looks set to complete a confirmatory cross, which will likely add volume, especially at this technically important level.
- Speaking of volume, we are seeing a steep turnover increase with HK$55 billion and HK$80 respectively for Thursday and Friday. Part of it is surely attributable to the HKEx share offering of HK$7.75 billion and the PICC IPO expected to price soon and causing cash inflows. Still, the volumes in general are higher than can be explained by this or secondary trading off it alone.
To more specifically highlight the arrow candle sticks, here is what the predecessors have meant:
- The upwards arrows indicate range consolidation started with a doji and with at least one more doji before bullish breakout. More dojis and tighter candle ranges indicates stronger breakouts. The last candlestick marked with an arrow is a borderline upwards arrow case
- The downwards arrows indicate bearish exhaustion, as it is a doji below a marubozu candle, either reversing or continuing bearish pressure, but taking out the sell pressure in the process. As a result, we get an increase in volume in the bullish candles following.
- Volume increases and the strong push normally occurs 2-3 days later for up arrows and 3-4 days later for down arrows, running for 5-6 days before correcting.
- We thus have a perfect fit here!
Fundamentally, this is all fuelled by continued inflows into Hong Kong, where the Hong Kong Monetary Authority needs to sell US dollars and deposit the proceed into the Hong Kong banking system to maintain the currency peg. We are seeing cycling of cash away from equity markets in the US and Europe, and a strong performance in open-to-inflow Eastern Asian markets, and I believe this could be further sustained under continued European and US examples of “muddle through” politics, although there is a strong risk in either collapsing entirely. This is not relevant for the next Hang Seng leg up to around 23 000, but becomes imperative after it is completed.
To take effective targets on this new run that I expect in the coming week, here is the weekly candle chart to support my targets:
The fib here is a closer look at the consolidated move downwards, and fairly well frames our analysis. Still, I am getting ahead of myself.
Trading a hook as was shown on the daily charts most normally targets the distance of the leg up but starting from the middle or bottom of the hook. Given how the bottom was soundly rejected, we use the middle instead to arrive at 21 820 for the “start” of leg 2. Now, the leg up was 800 index points, resulting in 22 600, and given the fib coincidence, I would be willing to say that the market will face significant headwinds in the 22 600 – 23 000 area, with a focus on 22 810 and below given trend progression. If we again return to the more detailed HSI weekly analysis, we see that the first pin bar drawn after the fib start and the upper range pin bars following it were formed around these levels, but more importantly also around the level of the trend we rejected two weeks ago representing the upper tiger stripe! Thus they were instrumental in dictating the market play off the trend, and now we have a similar pin bar going upwards at this level, coinciding with the trend line! Four candles back from the fib start there is another influential pin bar, and this is also good help in looking at this market and enforcing the analysis.
Volatility is also backing us up, showing a gapping doji downwards making a new low. This could indicate consolidation or falls as volatility increases later, but the stochastics of it (in lieu of MACD and ADX/DMI) indicate another push downwards for exhaustion before reversal.
After this play has occurred, there is a wider disparity of possible scenarios, mostly due to the macroeconomic picture worldwide. First and foremost, I maintain that there needs to be daily consolidation two to three weeks from now, but on the weekly time frame the price action I am forecasting will break the box-indicated weekly candle hook. This hook breaking would allow us to target 24 400 – 24 000 from the same methodology we used on the daily candles, this time looking at the 19 000 – 22 000 run, and considering how big this hook was and the trend we are drawing high volumes to beat resulting in the lower estimate. Volume will be key in deciding both speed and magnitude exactly should this move occur, which makes technical sense but is not strongly supported fundamentally.
My Trade Strategy:
- Target: 22 800. Stop: 21 800. Re-evaluate if either is hit, meaning if volume is higher on the way up, bet on volume, but if a HK$60+ billion tracks lower than 21 800 cut.
- Re-evaluated long would be using breakout stocks with beta of 1+, initially targeting 23 000, stop at 22 600.
- Upon matching this target a longer-term volatility-sensitive position is taken around 23 200 – 23 000 with target at 24 200 and stops at 22 800.
- For bear rejections, this is much more dependent on individual fundamental analysis as it could be originating from the political scene, volume withdrawals ahead of the end of the year, or just flat out profit-taking and sidelining money. Still, the target would be for the HSI at 21 600, where I will cover costs and reposition myself for 21 200, with the first stop at 22 000 (will only initiate this position after market falls below 22 000) then moved to 21 800.