Why the Hang Seng Could Face Big Losses

Fear ripples easily through financial markets, quickly rolling over fact and turning into ill-informed speculation. A downside of wide-spread instant news coverage – and internet coverage from mobile phones – is that a false rumor or an ill-informed opinion is spread just as quickly as intelligent and informed analysis. Unfortunately viewers are not always equipped with the skills needed to separate fact from fiction. Its one of the reasons they turn to CNBC.

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As with a number of regional markets its important to recognize that the decline in markets started before the Japanese earthquake. The Hang Seng's decline started in November 2010. The failed rally in January 2011 confirmed the second anchor point for the downtrend line. The position of the downtrend line was confirmed with the third failed rally early in March.

This creates a strong chart pattern. This is a long-term down sloping triangle. Support for the lower edge of the triangle is near 22,600. This has been an historical support and resistance level. The base of the triangle is measured and this is used to calculate the potential downside target. This is located near 20,000.

A confirmed weekly close below support near 22,600 has an initial downside target near 20,00. There is one problem with this. The 20,000 level is not an historical support level. This is located near 19,200. This suggests that a full development of this down sloping triangle pattern has a higher probability of falling to 19,200.

The triangle pattern is invalidated by a weekly close above the value of the downtrend line. Currently this is near 24,000.

The down sloping triangle pattern is bearish. This bearish analysis is also confirmed by the move below the longer term uptrend line. This line started in June 2010. The second anchor point is in September 2010 and the third in December 2010. The move below this trend line confirms this long-term up-trend has ended, but it does not signal the start of a new downtrend. This end of uptrend behavior can develop into consolidation, or a sideways movement prior to a continuation of the uptrend.

In the Hang Seng this broad pattern turned into a downsloping triangle. And this adds to the potential for a new downtrend to develop. Analysis of the chart behavior shows the Hang Seng Index was already showing significant weakness before the Japanese earthquake. These external events, including the attack on Libya, will accelerate existing trends. They did not initiate these downtrends.

Traders and investors who are on the sidelines waiting for a rebound from the over-sold panic initiated by the events in Japan need to apply more careful analysis to determine if the rally is a genuine, or just a rally in the context of an existing downtrend. Fear drives markets, but when it jumps on an existing down trend the result is more

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 ChartingAsia@cnbc.com. We welcome all questions, comments and requests.

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