Hang Seng and Shanghai Composite Index Technical Outlook: At Crossroads

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Hang Seng Index, Shanghai Composite Index, China/Hong Kong Equities – Technical Outlook:

  • Does it make or break for the Hang Seng Index?
  • Shanghai Composite Index risks further weakness.
  • Are there signs of a turnaround and what are the key levels to watch?

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HANG SENG INDEX TECHNICAL GUIDE – BASSIST

The Hang Seng Index looks deeply oversold as it nears key technical support, showing some consolidation and or rebound. However, there is plenty of resistance to cap any bounce, keeping the overall medium-term downward bias intact.

After closing at a new 6.5-year low last week on the chart below, Hong Kong’s benchmark index is testing crucial long-term support on a 2016 horizontal trend line at 18,235. This level is strong, and a break below is not imminent at all. Indeed, with the Relative Strength Index (RSI) below 35 across intraday and higher time frames, the index could rebound slightly in the near term.

However, any rebound is unlikely to be significant due to a series of resistance beginning with last week’s high of 19,492, followed by the late August high of 20,185. For medium-term downward pressure, the index would need to break above the June high of 22,449, slightly above the 200-day moving average.

Until then, the big-picture downtrend remains intact – the Moving Average Convergence Divergence (MACD) indicator, a measure of trend and trend strength, remains negative across multiple timeframes. A decisive break below 18,235 could initially pave the way to an internal downtrend line within a 2015 descending channel (now at around 17,820), possibly to the 2011 low of 16,170 (see chart).

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HANG SENG INDEX Monthly Chart

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EXCHANGE COMPOSITE INDEX TECHNICAL WATCH – BASSIST

This week’s break below major technical support indicates that the Shanghai Composite Index could fall further in the coming days or weeks. The drop below a slightly upward sloping trend from August triggered a bearish triangle break, indicating a drop to 3,040, the price target of the pattern.

Triangles are continuation patterns, and a break of the pattern typically means a resumption of the previous trend in strength. For China’s benchmark index, the trend has been declining since June, when it failed to break through strong resistance on the 200-day moving average, coinciding with the upper edge of the rising channel from March.

There is quite strong support on the lower edge of the channel (now at around 3,100). Previous attempts at internal trend lines within the channel have resulted in either short breaks or even a trend reversal. So, a small bounce this time would not be surprising. However, any potential rebound could face obstacles, starting with the early-September low of 3,174 followed by the mid-September high of 3,278.

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EXCHANGE COMPOSITE INDEX Daily Chart

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— Written by Manish Jaradi, Strategist for DailyFX.com

To contact Manish, use the comments section below.



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