Hang Seng and Shanghai Composite Index Technical Outlook: Bearish

HSI, Hang Seng Index, Shanghai Composite Index, China/Hong Kong equities – Technical Outlook:

• Looming bearish break in the Hang Seng Index.
• Potential more downside for the Shanghai Composite Index.
• What are the key levels to watch?

HANG SENG INDEX TECHNICAL FORECAST – BEARISH

The Hang Seng Index’s (HSI) close last week below a crucial long-term support points to further weakness in coming days/weeks. The index last week closed below long-term support on a horizontal trendline from 2016 at 18,235 (see chart). Given the significance of the support and the number of times it has been tested, it might be prudent to wait for at least one more weekly close below the support.

To be sure, the probability of a break below the support and the downtrend continuing is rising. That’s because the Moving Average Convergence Divergence indicator (MACD), a measure of trend and the strength of a trend, remains negative across multiple timeframes. Moreover, the break earlier this year below the 200-month moving average, an uptrend line from 2008, and the March 2020 low confirmed that the big-picture uptrend has reversed.

A close this week below 18,235 could expose the downside towards the 2011 low of 16,170, slightly above 15,590 (the 78.6% retracement of the 2008-2018 rise). On the upside, there is potential immediate resistance at the May low of 19,179 and possibly stronger resistance at the end August high of 20,185.

HANG SENG INDEXMonthly Chart

Chart Created Using TradingView

SHANGHAI COMPOSITE INDEX TECHNICAL FORECAST – BEARISH

The Shanghai Composite Index appears set to test support at mid-May low of 3,043, followed by the early-May low of 2,957. This follows a break last week below a slightly upward sloping trendline from August which triggered a bearish breakout from a two-month long triangle. The break below the trendline has opened way towards 3,040, the price objective of the triangle pattern.

Moreover, last week’s close below the lower edge of a rising channel from April, the pattern of ‘lower lows’ since mid-September, and the MACD in the negative territory reaffirm the medium-term downtrend. Cracks in the two-year uptrend that began in 2019 emerged after the index broke out of the range and decisively fell below the 200-day moving average (see chart).

Subsequent attempts to recoup losses, while meaningful on smaller timeframe charts, weren’t enough to reverse the medium-term downtrend. The index would at the very least need to break above the mid-September high of 3,278 for the downward pressure to fade. However, there is no sign of reversal of the downtrend even on smaller timeframe charts as the index continues to make new lows on the daily charts.

SHANGHAI COMPOSITE INDEX Daily Chart

Chart Created Using TradingView

–— Written by Manish Jaradi, Strategist for DailyFX.com