Charting Asia

Hang Seng Highs and Lows

The Year of the Rat hasn't treated Hong Kong's Hang Seng Index very well so far. Year-to-date, the index is down over 10 percent. But things have been picking up of late. Month-to-date, the Hang Seng is up 9 percent. Is the Index turning a corner?

The Hang Seng Index brings together the several features that precede a significant change in trend. These include a change in the relationship between traders and investors.

Simple technical analysis methods indicate a change in the market trend when the index closes above the downtrend line.

In a bear market this is a dangerous approach. A move above the trend line changes the role of the trend line from that of resistance to that of support. These early trend breakouts can retreat to the trend line, and using it as a support level, slide down towards the next historical support level.

Simple technical analysis may use a moving average crossover as an entry signal. More complex indicators such as MACD or Stochastic are a variation of moving averages and they tell us little about the probability of a successful trend change.

A genuine trend break requires more than traders enthusiasm or a mathematical crossover of averages. It needs support from investors. We need to see this group enter the market as buyers. Rather than using each rally as a sell opportunity, the investors use the retreat from the rally as a buying opportunity.

In Hong Kong, this developed early last week. The evidence of investors buying is provided by the long term group of (GMMA). As the initial rally developed, the long term group of averages compressed and began to turn upwards. This shows investors are entering the market as buyers. When the rally retreat developed last week we saw a similar reaction. This confirmed investors remained in the market as buyers. Their support is essential for any new trend.

Historical support is located near 23,500 and resistance near 25,200. The initial rally breakout may test support before developing a stronger rebound. Support failure confirms trend breakout failure. It will also be confirmed when the short term GMMA crosses below the long term GMMA.

The resistance level at 25,200 is a recent development. It was not a consolidation level in the Hang Seng rise in 2007. This suggests it will provide weaker resistance as the rally gathers momentum. Traders look for a pause around this level. Investors will use a retreat from this level as an entry opportunity for the strong developing trend.

The longer term historical resistance is located near 27,500. This provides a stronger resistance level within the 6 to 12 week timeframe. The Hang Seng is developing a bullish breakout. Traders will also look for the similar conditions developing in other regional markets.  The Hang Seng is a leading case study for the regional market behavior.

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