Hang Seng Index technical outlook: a pause, not a reversal

Hang Seng Index technical outlook - bullish

The recent retreat in Hong Kong shares appears to be a pause and not a reversal of the uptrend. Indeed, breadth market indications and technical charts continue to paint a bullish story over the coming weeks.

Price facts, sentiment, narrative

Price Facts

• The Hang Seng Index (HSI) rose to an 11-month high at the end of last month. Although the upward momentum has slowed most recently, there is no sign of a reversal. The break last month above the 200-day moving average confirms that the short-term trend is bullish.

Sentiment

• In only three weeks of 2023, foreign buying of Chinese stocks exceeded last year's total.

Narrative

• China's ending of its zero-Covid policy and signs of easier monetary policy (new loans likely surged in January) is leading to a re-rating of economic growth prospects. Less regulatory pressure on China's internet and gaming sectors, and easing of Sino-US tensions is supportive.
  
  Notwithstanding the recent rebound, HK stocks were trading at the cheapest level in more than 10 years. Risk: from a longer-term perspective, structurally subdued Chinese economic growth on deteriorating demographics poses a headwind.

As of Thursday, 96% of the members in the Hang Seng Index (HSI) were above their respective 100-day moving averages (DMAs), not too far from 100% a week ago. Data from 2001 onwards suggests that when 100% of the members are above their respective 100-DMAs, the index has been up 60% of the time over the subsequent 120 days (see distribution plot of returns).

Distribution plot of returns over 120 days

On technical charts, HSI has pulled back from stiff resistance on a horizontal line from early 2022 (at about), coinciding with the 89-week moving average. The drop below the lower edge of a rising channel from October confirms that the upward pressure has faded somewhat in the short term (somewhat because of the steepness of the channel.

That is, even sideways price action can lead to a break below the channel, but it may not be necessarily bearish).

However, the broader trend continues to be bullish, (see previous update for more details) as reflected by the Moving Average Convergence Divergence indicator in the positive territory and the color-coded candles.

Having said that, consolidation doesn’t necessarily mean that the index can’t fall further – it could, but generally not deep enough to alter the broader trajectory.

Hang Seng Index daily chart

In this regard, there is quite a strong converged cushion at the early-December high of 19926, coinciding with the 89-day moving average (DMA) and the 200-DMA. Stronger support is on the lower edge of the Ichimoku cloud cover (now at about 18000).