Hang Seng Index at a crucial level – buy or sell?

Trading in the Hang Seng Index (HSI) is at a crucial point. On Thursday the HSI touched a low just below 20,000. The chart shows that this price action filled a gap created during the extraordinary recent rise in the market.

This price action created a line in the sand, that touches both the top of the gap candle and Thursday’s low.

The line at 19,500 now represents a crucial inflection point for the HSI. Any fall below this level, and especially any close under 19,500, may be interpreted as a sell signal. On the other hand, having filled the gap, while the HSI respects the support at 19,500 the technical outlook is positive.

This chart-based analysis also fits with a fundamental understanding of the events of the past few weeks. The stimulus measures announced by authorities in China are a game changer, prompting economists and analysts to lift their estimates of growth and profits. A positive reaction from investors and traders is fitting, but market participants may have pushed too hard, too fast.

This could mean the HSI is consolidating before making further, smoother gains. The fall from the high is 40% of the initial run up – very close to the Fibonacci retracement level of 38.2%.

Some investors may see the coming days and weeks as a period of consolidating the market gains. This market action could form a base around 20,000 to 21,000, setting the scene for a potential move higher from current levels.

It’s important to note that short-term volatility measures, such as the 20-day historical volatility shown at the bottom of the chart, remain higher. This is a sign that risk is also higher at the moment. If the market does trade steadily over the coming days, the volatility may start to drop, sharply, potentially signalling to investors that the risk and reward equation is tilting towards owning more shares.

While the future is always uncertain, the market may follow a sideways trading pattern over the next little while, before making its next major move. Those who see a policy friendly path could consider using any quieter trading as an opportunity to re-position ahead of the next leg.