China A50 and Hang Seng index prices overbought in uptrend

A reopening of the Chinese economy, ‘post’ prolonged covid lockdown conditions, has helped reinvigorate benchmark indices representing the region. Gains have been further supported by recent intent by Chinese authorities to support a fragile property sector and limit contagion to the financial sector. Chinese property and development have in the past been a major contributor to the regions Gross Domestic Product (GDP).

China GDP

GDP reported out of China fell to 3% in 2022, a far cry from the 5.5% government target set at the beginning of the year. Zero-tolerance covid policy had seen China closed for business for a significant portion of the year. However, the realized fourth quarter growth figure of 2.9% was well ahead of consensus (1.8%), while the full year figure (3%) exceeded the World Bank forecasted growth figure of 2.7%.

China A50

The China A50 Index price now trades firmly above the 20 (red), 50 (green) and 200 (blue) simple moving averages (MAs). This is suggesting that the short to longer term trend bias for the index is up currently. The initial reversal was noted with the 20MA crossing above the 50MA (marked with the red arrow), providing a tentative suggestion that the short to medium term trends had moved from down to up.

The Stochastic oscillator does however suggest the price of the index to be trading in overbought territory. The overbought signal is a contrarian indication relative to the uptrend bias currently assumed.

Putting these indicators together suggest that traders might prefer to look for long entry on the index should a pullback from overbought territory occur, rather than looking to short the market right now.

A pullback towards support and the 200MA at 13275 might be considered buyable should it conclude with a bullish price reversal (candle stick pattern). In this scenario, a close below 12670 might be used as a stop loss indication while targeting a move back towards resistance at 15100.

Should the pullback not conclude with a bullish price reversal, but instead move the price past support at 12670, the upward trend bias currently assumed would need to be reassessed.

The Hang Seng Index

Like the China A50 Index, we see the Hang Seng (Hong Kong) index trading in a confirmed uptrend, although is also looking overbought in the near term. The moving averages (20MA, 50MA and 200MA) currently confirm this uptrend, while the stochastic highlights the overbought signal.

In turn traders might prefer to look for long entry on the index should a pullback from overbought territory occur, rather than looking to short the market right now.

A pullback towards support at 20100 might be considered buyable should it conclude with a bullish price reversal (candle stick pattern). In this scenario, a close below 18880 might be used as a stop loss indication while targeting a move back towards resistance at 22550.

Should the pullback not conclude with a bullish price reversal, but instead move the price past support at 18880, the upward trend bias currently assumed would need to be reassessed.