Hang Seng Index – looking for a breakout

Calmer conditions have returned to trading in the Hang Seng Index (.HSI). After the announcement of the latest stimulus in China the index soared, and then retraced. Three weeks later, after a period of sideways trading, volatility has turned down and the daily fluctuations have usefully provided an inner trading range.

The inner trading range is marked on the chart. The range is supported at 20,300, and hits resistance at 21,000.

This inner range now provides potential trading or investing signals. A break below 20,300 could see significant further falls, especially if any downward momentum pushed through the gap line at 19,950. Alternatively, a break up through 21,000 could see significant gains, and possibly a test of the recent high at 23,242.

The Hang Seng has shown remarkable resilience this week in spite of the election of the trade warrior Donald Trump. The Republican party campaigned on the re-introduction of trade barriers and tariffs on all imported goods, with a focus on goods from China. The positive performance of the Hong Kong market following this news is remarkable, and suggests underlying strength.

Many traders who use breakout signals in their trading approach will wait for the index to break out of the inner range. However there is a scenario that could see investors moving now, and picking up the stocks or ETFs they’ve identified as good buys at the right time. That scenario is the announcement of further stimulus measures, possibly over a weekend.

A strong fiscal support package could see the Hang Seng open well above the resistance at 21,000, a difficult situation for traders as the ideal break signal allows a trade entry close to the break out level.

Although this scenario does not suit traders, it could represent an opportunity for investors. The index has consolidated, and short term volatility is falling back (bottom of chart). The strength in the face of bad news this week is another factor. These conditions may see some investors decide that the time to buy is now.