Hang Seng breadth hits one-year peak – will the downtrend reassert itself?
The surge in the Hang Seng from its January low may be poised to come to an end, if performance over the past year is any guide.
Gauging Market Trends Using the 20-Day Moving Average
Tracking the percentage of stocks trading above their 20-day moving average (MA) can provide useful insights into the overall technical health of an index and help identify potential turning points. This indicator has proven effective for determining both uptrends and downtrends across global equity benchmarks.
During sustained rallies, low readings under 30% often signal that selling pressure may be exhausted and a new leg higher could be imminent. The market is considered oversold and ready for a rebound. As the uptrend resumes, the percentage will climb back above 50% and potentially into overbought territory above 70%.
For markets in correction mode, readings above 80-90% frequently mark peaks where the momentum stalls. This suggests a near-term high is in place and additional downside is ahead as the downtrend regains control. Sustained readings below 50% confirm the bearish bias.
Hang Seng in counter-trend bounce
A current example is the Hang Seng Index, which has been mired in a downtrend but rallied 13% off its October 2022 low, the worst levels in over 14 years. This bounce brought hope of a trend reversal. However, the percentage of Hang Seng stocks trading above their 20-day MA has now reached 92%, the highest reading since September 2021.
This overbought condition implies the Hang Seng’s rally is likely exaggerated and could be nearing exhaustion. While the index may see a brief period of sideways consolidation, odds favour the downtrend exerting itself again before any meaningful rebound can take hold.
Since the beginning of 2023, peaks in the Hang Seng’s percentage of stocks above the 20-day simple moving average (SMA) were followed up by significant price declines, as shown in the table below:
| 20 day return | 50 day return | |
| 17-Apr-23 | -4.03% | -9.76% |
| 19-Jun-23 | -9.66% | -12.44% |
| 31-Jul-23 | -14.63% | -13.95% |
| 04-Sep-23 | -20.86% | -16.54% |
| 17-Oct-23 | 1.69% | -4.26% |
| 06-Nov-23 | -7.93% | -16.73% |
| 21-Nov-23 | -7.45% | -14.17% |
| 29-Dec-23 | -6.03% | |
| Average | -8.61% | -12.55% |
Source: Reuters Eikon/IG
This time may be different, but the recent surge in the Hang Seng seems to require at least some short-term consolidation before it can keep moving higher.
Hang Seng technical analysis
The bounce from the January low has seen the index gain almost 14%, and close above the 100-day SMA for the first time since early-November.
However, if a lower high is created here, perhaps with a close back below 16,350, then we could see a new leg lower down towards 15,000.
In the short-term, the 17,120 high from late-January could act as a barrier to any further upside.
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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