Click on graph to enlarge

Hong Kong’s Hang Seng Index retains its volatility, but remains in a strong downtrend. This provides short term long side trades, and longer term short side trades. A retest of the 2008 lows cannot be excluded.

The first observation about the Hang Seng

.HSI loading...

Quote  |  Chart  |  News  |  Profile

[.HSI  Loading...      ()   ] is obvious, but still ignored by many. The Hang Seng is not a substitute for trading the Shanghai Index. The behavior is very different. Starting at the end of the first quarter in 2011 the Hang Seng developed a strong and persistent downtrend.

The downtrend line is the dominant feature on the chart. This line is the ultimate cap on every rally in 2011 and it will be the most important rally cap in 2012. This is a well-established resistance level. A breakout above this line will signal a major change in the trend and will be the most important long-side trading signal.

The fall is defined by the trend line, but the limits of the fall are defined by the support and resistance levels. The most significant current support level is near 17,200.

A sustained fall below this level has support near 15,800, which is the level of the small consolidation band following the depths of the 2008 collapse. This is as market well on the way to retesting the 2008 lows.

Traders can enjoy the rallies, but they must keep a close eye on the resistance levels, and the value of the downtrend line. These are reaction points and the points for taking profits from long side trades.

On balance we are bearish on the Hang Seng but we also look for evidence of consolidation and a powerful move above the downtrend line to signal its time to take long side positions.

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's Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.

If you would like Daryl to chart a specific stock, commodity or currency, please write to us at . We welcome all questions, comments and requests.

CNBC assumes no responsibility for any losses, damages or liability whatsoever suffered or incurred by any person, resulting from or attributable to the use of the information published on this site. User is using this information at his/her sole risk.