It’s been longer than I expected, but it’s been a while since I had a relaxing weekend, and that ended up taking priority. Also, charting can be a handful at times so that was largely what yesterday was reserved for.
I’ve split this up into Hong Kong/China charts, currencies, and precious metals, being presented in that order. Japan has gotten its dues and is not a particularly interesting long-term case since once we crack Nikkei 225’s 17 500 points and the TOPIX 1407 points, we have large upsides before material resistances start showing up. Loose discussions on Japanese equity will be held during the yen-focused currency outlook, but that’s pretty much it. Let’s dig into the charts we have!
Hong Kong / China:
Here is the Hang Seng Index, spot implied from futures prices as per usual on CMC Market’s charts.
At the moment, we have some things that are definitely speaking in favour of a continued upswing just from the technicals alone, not just the market structure change with the Shanghai – Hong Kong Stock Connect.
- First of all we have an upswing indicated by the MACD[13, 52, 13], which here takes quarterly data and compares it to an annual moving average. The divergence is bottoming out at a positive signal level, indicating that we have a chance to push significantly higher.
- ADX/DMI with quarterly data (13 weeks) just barely eked out a positive cross last week, and these crosses have a lot of strength on these time frames, indicating a good chance of a decent run, indicating at least 2000 points worth of trading, with recent runs upwards being around the 2 000 – 3 000 point range. Recent falls have been somewhere around 1 500 on average. This would imply an index value of around 26 200 between New Year and Chinese New Year.
- The orange bottom trend line is strong! Touches here also imply a 2 000 point run, and it would imply an index value of at least 24 600 but the potential for much more.
- Bouncing off this line often implies a jump to 3000 points above the trend line before having a wider market top. This line is not charted and is somewhat fluffy, but it would imply a 26 000 target for the HSI.
- We’re above the 61.8% weekly closes Fibonacci level given by the 2007 peak to the 2008 bottom. This is significant and having another close above these levels on its own should be enough to at least challenge 25 300 again.
- The recent bottom didn’t have to test the major yellow trend line at the bottom, and we are now above the “rush line” above it that crosses of that line have implied hitting. This yellow line has been a divider between different trading patterns, orderly when above and more volatile when below, and with a parallel layer below as well (not charted, but seen pretty easily in the 2009 – 2012 period). The parallel level explains why the 38.2% Fibonacci level is not firm.
- Using the EMA’s here is a little bit deceiving, since they’re using weekly data. Still, the clear rejection of the 13-week EMA is a very good sign that bodes well for future gains.
- Generally, with the slope and prevailing trends, it looks like the Hang Seng Index is very slowly shifting into bullish shepherding supports and resistances, rather than the bearish ones that were prevalent after the great Financial Crisis.
The targeting here from a technical perspective thus becomes 26 500, to match the tendencies around these support lines and get a significant test around the 2007 – 2008 support-turned resistance level that identifies the upper yellow line.
Hang Seng China Enterprises Index:
The China Enterprises Index shares a lot of features with the HSI, but it is yet to break away from the supports/resistance regime of the post-financial crisis environment. Of course, these shares are Chinese, and China is not as shareholder-friendly a place to be as either Hong Kong or any western market.
- Here, we’re happy with crossing the 38.2% Fibonacci level!
- We have a very good triangle pattern that needs to be broken, and given the Chinese policy inclination I have a very hard time believing that this will not be a break higher.
- This will probably not be a big break, the triangle pattern has riddled the area between 11 000 and 14 500 with prior peaks and support/resistance levels, with major care needed at the 12 000 point area (10% above here, and 20% above the October correction) after taking out peak resistances clustered around 11 500.
- After 12 000, it will be easier, with marks around 12 600 and 14 000 being the major road blocks.
It looks much more likely that we will have a correction in the China Enterprises Index after hitting 12 000, possibly towards either 11 500 or 10 800. if this coincides with the orange trend line, all the better. After “flushing” the momentum indicators from overbought levels, that would clear the way for a break of 12 000 / 12 600, but highlighting when this would happen feels like a fool’s errand, but a trip from here to 12 000 and back in three months would allow tangenting the orange trend line.
For both the Hang Seng Index and the Hang Seng China Enterprises Index, you can view daily views of these indices on the Watched Charts page.
Probably more interesting is the China A-shares market, since that will directly be affected by the stock connect. Here is a look:
This chart is not as good as the ones above, and not as good as the one I have from two and a half years ago on the Long Term Outlooks and Analysis page. I highly recommend looking at that chart in detail, as the fibs will probably play a part here aw well. Most important is the re-emergence of the 76.4% Fibonacci level off the 2009 performance, at 7 910. This is even more relevant given the 2014 weekly-close bottoms being at 6 600 which set off the 2008 move that started that Fibonacci level. The 9 400 level that defines the chart above also comes around in that analysis, as the 50% level on the same move.
Probably more interesting is the potential for this to be a move similar to that at the end of 2012 that lasted to the end of 2013. We went from 7 000 points to 9 300 in two months, and if the PBOC caves in and provides stimulus in any broader measure to support the Shanghai – Hong Kong Stock connect a repeat doesn’t seem too far-fetched. There are definitely interesting motions to go through here. Please see the old chart for reference here:
Yes, the top line above is tempting to extend, but it would require a flattening of the slope to make a bit more sense, and then it loses the footing it gets from where the trend line is set up. Drawing and extending this line is very discretionary, but I am personally not happy with how extending this would work out.
This discussion will be on the three majors, EUR/USD, USD/JPY and EUR/JPY. Mostly, this is done to be able to forecast the USD/JPY moves, given the recent breakouts that the pair has had.
I haven’t adjusted the dynamics here (not really worth much in a trend like this to be honest) but the 2002 – 2004 move is probably the best static we have to go on, and many of the since-defined peaks and troughs are playing off of it until 2008.
Crossing the 38.2% line meant momentum, and either pinging the 23.6% level or the 61.8% level. Only once did the 50% hold the pair back. 118.16 thus doesn’t looks so strong since we got a clear cross of the 114.4 level. This further lends support to the 118 – 121 range idea, particularly if there are yen-negative discussions out of Tokyo this coming week as everyone expects.
So, where do we look for better short-term relationships? Well other currency pairs!
Let’s start with the EUR/JPY:
This pair closed on the strongest monthly close since 2008, and 0.04 yen away from the highest price since that time, with a new high. Price has crossed, and the 145.7 level might act as intermediary resistance, but after that we get pretty clear paths to 150, and 155 before previous price sincerely starts eating into the pair. Not much to say actually, but this level around 145.7 will be rather important when looking at the other pair completing the triangle.
If the pair was to fall to its recent low, and the EUR/JPY stays stable, that would mean a USD/JPY at 117.87. What are the odds of that, or an even lower EUR/USD? Pretty big!
- The 21 day EMA is lurking right there. Crossing this level and the top trend line will not be easy.
- There is thicker resistance around 1.26 to fight than almost anywhere else on this chart.
- Stimulus and growth mechanics differ enough between these two areas that I doubt traders will mount an effective buying rush into the euro that can crack the 1.28 level, and that opens up for further falling.
I would not be surprised to see 1.22 by year end, which would send the yen to the top of the range I expect it at, all else equal.
So then, what are the odds for broader dollar strengthening? They are pretty good as well. Looking at precious metals is perhaps more instructive – natural gas is too volatile to make much sense of anything, and oil prices look like someone threw them off a cliff, so they’re having extremely biased momentum indicators. Gold and silver are giving good signals though!
The chart is relatively self-explanatory at this point. Bad momentum indicators, strong falling trend lines that the price is running into, and a doozy of a resistance at 1200. Going long-term long here seems near-suicidal. If we have a fall that is as strong as the mid-2013 break, then going into 900 doesn’t seem impossible. The case is not that strong (the whole market didn’t go bear-only after 1200 like it did after breaking the top triangle around 1570) but otherwise a lot of the trend line action looks similar to that around 1600. The DMI action is even more aggressive this time around, actually, and the ADX-enhanced setup looks very similar to early 2013, where we now have a stronger trend after breaking the 1200 level that acted as support for nearly 18 months.
Silver provides a somewhat easier picture to analyze:
The equivalent line to gold’s 1200 in silver is 19.24. silver’s momentum is much more pronounced, and the breakout for silver in late September has even sent it below the top yellow trend line, with the quarterly EMA hounding it lower. Seeing silver drop down to a 10-12 range is not out of the question with this setup, and it dragging gold lower with it seems mostly like a matter of time at the moment.
The dynamics are very powerful here with a rising trend on the ADX/DMI, and negative MACD trend and signal.
Overall, this produces a dollar-strength picture, which as of late has been risk-positive. Both of those factors will likely help support USD/JPY and USD/EUR, as well as Asian stock markets. Structural changes in dollar strength bias, China equity market valuations, and overall China market attractiveness that can be observed in everything from trend shifts in Hong Kong technicals to IPO valuations and ETF interest look promising, not to mention the massive revaluation going on in Japan at the moment. All of this makes the market look like it is in a sweet spot right now.
These developments will likely help money flow into Hong Kong given that Hong Kong looks like an attractive place to put money thanks to the peg to the US dollar. The strengthening or stability of the RMB makes it even more attractive, and if liquidity or outright stimulus is pumped into the Shanghai market, it looks like a massively attractive investment. I do expect the Stock Connect to see a lot of interest, and the question will probably be whether or not investors can have discipline to avoid tripping the purchase limit circuit breakers for the market as a whole, to not allow net selling to be done for a majority of the day.
The stars are aligned, let the trading begin!