Travelling Technicals with Global Indices: The Hang Seng

A few weeks back I did analysis on two Chinese indices that represented a number of stocks listed in mainland China and discussed what impact financial market reforms were having on the valuations by driving up prices due to the speculative nature of the participants involved. I also said that the lack of significant interest in Chinese financial markets had made both fundamental and technical analysis very difficult until recently when government took the decision to liberalise the stock market.

Today's chart focuses on a market that forms part of China yet was absent of communist rule during the height of the political system. The region of Hong Kong was occupied by the British for many decades but has subsequently been returned to China with a great degree of autonomy attached to it. The region provided Britain a trade port to access to Asian economies and has grown its relative importance amongst the world's prominent financial centres to one of the most closely watched.  

Hong Kong's strong links to the West has meant that its financial markets are sturdy and well regulated allowing Chinese policymakers the chance to examine the blueprint of how these types of markets should be run. The Hang Seng Index has a long history spanning as far back as 1969 with many Chinese companies opting to list on the established Hong Kong Stock Exchange. 

Quarterly

Since the index has a long history I decided to take advantage of that by gauging the movement we've seen happening over the last 28 years. This gives us a much clearer picture to how things have panned out over almost three decades but more importantly how the handover of authority in 1997 back to the Chinese government has translated into better or worse returns for companies tracked by the index. 

If we look at the high of 16 000 made in 1997 and immediately look at the highest point to date which happened in 2007 with a level of 32 000 that's double the valuation in 10 years. Up to this point things were looking good for the index until 2008 when it all went pear shaped. 

I also noted a steady uptrend starting from 2003 and still remaining in place with a recent retest at 20 000 in this quarter. The confluence between this support and the 50 SMA gives the bulls some space to manoeuvre however the fact that price attempted to break away but was stopped abruptly in its pathway leading to even bigger declines suggests the sellers are on the prowl.  

There was a period between 2009 and 2015 where price seemed to hover around and failed to register new highs or low which is why the failed attempt to break higher is so critical in our analysis. The compressive nature of price action over an extended period of time meant that the direction in which price moves would guide us over the medium term. 

Monthly

A common theme I've found with most global equity indices is the uptrend formed after the lows of 2009 were put in with this chart not being the exception. Observing the compressive environment made me pay particular attention to the space I marked out in the previous chart with a square. By zooming in I was able to find an ascending triangle with a projected 50% upside potential. 

Had this pattern worked its way through we might have seen new highs being put in by the Hang Seng however this wasn't the case as the retest proved all too fatal for the formation with price piercing easily through the long term uptrend indicating intention to change sentiment. 

The fall that has occurred over the past year has wiped out a good amount of gains made but I wouldn't be surprised to see price regaining some lost ground over the medium term, possibly testing the underside of the uptrend which should provide stiff resistance. The stochastic confirms this views by lying in oversold territory 

Should that happen it is unclear what direction the index could be headed to but because the long term timeframe would suggest a failure to break higher my suspicions would be to the downside. The level of 16 000 could be the support you ought to look for in this scenario. One thing is clear from the first 10 weeks of analysis, the year 2016 looks likely to be a grim one.