Markets start to incorporate news when it's just rumor and the information is quickly built into the price behavior.
This makes stock prices best summary of all the information that is known, guessed at, speculated about and suspected. However, this doesn't mean the price is absolutely 'correct' as it combines intelligence and ignorance, both of which are not always in equal measure.
Which, in a roundabout way, brings us back our chart focus of this week: Hong Kong-listed HSBC. The chart shows four technical features, all of which anticipated the bank's disappointing earnings report on Monday.
First, is the move below the uptrend line. From March 2009 until December, the uptrend line acted as a support level. The move below the line shows a change in the trend.
Second, is the development of a small . The height of this pattern is relatively small, suggesting that the developing trend retreat would be limited. The downside projection for this pattern is near $76, which is also a previous support level, verifying support in this area.
It's an interesting co-incidence that the height of the shoulders is near to the historical resistance level of near $91. This has no particular analysis significance; it's important not to confuse coincidence with correlation.
Third, is the development of a downtrend line. This uses two points, and until it is confirmed with a third point, the line remains tentative. The current rally has the potential to reach the value of the line and then retreat. This would confirm the placement of the line.
Fourth is the flattening of GMMA investor support.
Bring these four features together, and it suggests investors already anticipated negative news surrounding HSBC ahead of its results release. Investors may not have known the exact details of the news, but many probably already suspected that an announcement was developing that would put pressure on company performance.
There are three behaviours investors will now look for to confirm an increased probability of a change in the direction of the trend. The most important one is to watch is a move above the downtrend line. This shows a bullish breakout and a potential resumption of the uptrend.
The next important behavior to watch is the strength of support near $76. If price retreats from the downtrend line, then it is important for support to hold. Failure of support at $76 confirms the strength of the current downtrend. It turns this into a new downtrend rather than a retreat and rally pattern. New downside targets are near $66.
The support at $76 has another role to play if the downtrend lines act as a support line after the initial breakout. This is when the price moves above the downtrend line and then slides down the downtrend line until it hits the horizontal support level neat $76. This is a weak breakout and points the way to a support consolidation period.
The third behaviour is the strength of the long term (GMMA). The trend towards separation in the GMMA has ended and this tells us investors are no longer quite as enthusiastic about HSBC. The stability of this separation suggests investors have not yet become sellers and this increases the probability of a successful rebound and tests of the downtrend line.
Dividend and earnings announcements rarely have the power to change the direction of the trend but they do have the power to encourage the continuation of existing pressures in the price behavior.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –.. He is a regular guest on CNBCAsia 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 ChartingAsia@cnbc.com. We welcome all questions, comments and requests.
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