HK Stocks in Uptrend, but Cautious over China: Charts

Hong Kong remains the primary entre-port into China and north Asia investments. And for this reason, its market quickly feels the effect of decisions made in Beijing, and the tensions in North Korea.

The sharp sell off in the Hang Seng in reaction to the recent North Korean attack dropped the benchmark index back to retest support near 23,000. This reaction was stronger than the reaction in the South Korean stock markets and reflects the fear of Western market participants rather than the assessment of local investors.

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The index activity with the Hang Seng has been confined within a broad trading band. The lower edge of the trading band is near 19100. The upper edge is near 22,500. The upper and lower edges cannot be precisely defined and the index has temporarily dipped below, and moved above each of these levels. However, as a broad definition they capture the prolonged sideways movement of the Hang Seng from the latter part of 2009 to September 2010. Movement within the band has been characterized by relatively fast rallies and rapid retreats.

This prolonged sideways pattern creates a base for future trend breakout activity. The width of the trading band is measured, and this value is projected upwards to provide an upside target. The calculated target is near 25,800. This target level is near to the peak achieved in May 2008. This peak was the top of the right shoulder in the head and shoulder pattern that accurately set the downside targets for the market near 10,900. The combination of this historical peak and the trade band target projection provides a greater degree of reliability with this target projection.

The pattern of sideways behavior suggests a repeat of the steady rally and fast retreat behavior, but confirmed at a higher level. The lower edge the new trading band is near 22,500. The next rally target is near 25,800. The surge in the Shanghai Index, and the move above the upper level of its trading band will transfer to the Hong Kong market. This suggests the potential for a rapid move towards 22,800.

The underlying uptrend is strong. The long term group of averages in the Guppy Multiple Moving Average indicator are well separated. This shows strong investor buying when the index develops a retreat. Full trend confirmation comes when the lower edge of the long term GMMA is above the upper edge of the old trading and near 22,500. Under these conditions there is an increased probability of a market breakout above 25,800.

The market trend is developing strength, but when the empire beckons, this market will follow. The behavior of the reaction is determined by the Western reactions.

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

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