Hang Seng Index and Shanghai Composite Index Technical Outlook: Bearish

HANG SENG, SHANGHAI COMPOSITE – Technical Outlook:

• The Hang Seng Index continues to make new lows.
• The Shanghai Composite Index risks further decline.
• How much more downside for the indices and what are the key levels to watch?

HANG SENG INDEX SHORT-TERM TECHNICAL OUTLOOK – BEARISH

A new 11-year low registered last week is a sign that the broader downtrend in the Hang Seng Index (HSI) remains intact. This follows a series of support breaks since early 2022, including the vital 200-week moving average, the 2020 low and the March 2022 low. With the Moving Average Convergence Divergence (MACD) indicator now firmly in negative territory on the monthly chart, the downtrend is well-entrenched (MACD < 0 indicates a downtrend) and could potentially lead towards the next significant support at the 2011 low of 16170.

More recently though, the downtrend appears to be losing some momentum, as hinted at with positive divergence (falling index prices alongside rising momentum indicators) and a bullish reversal candle on the weekly charts. While this is unlikely to alter the overall bearish outlook, it does raise the possibility of some sort of consolidation/minor rebound in the short term before resuming its decline.

Hang Seng Index Daily Chart

Chart Created Using TradingView

One confirmation that the near-term trend is shifting to sideways would be a rise above immediate support-turned-resistance at the March low of 18235, which could open the way towards retesting the May low of 19179. Strong resistance seems to be marked by the 89-day moving average: the index was last decisively above it in early 2021.

SHANGHAI COMPOSITE INDEX SHORT-TERM TECHNICAL OUTLOOK – BEARISH

As trading resumes after the National Day holidays, the Shanghai Composite Index could continue its decline after breaking below key support on the lower edge of a rising channel set from March last month. While the index has achieved the target of the triangle triggered in September, lower lows on the daily charts before the holidays are a sign that the bearish trend remains intact.

Shanghai Composite Index Daily Chart

Chart Created Using TradingView

The next support comes in at the mid-May low of 2957, followed by a stronger hurdle at the April low of 2864. The latter level also marks the 200-month moving average. The index hasn’t decisively broken below that since the Great Financial Crisis. Subsequent support is at the 2020 low of 2647. A further major threshold is at the 2019 low of 2441, and a decisive break below this would be very damaging to the big-picture outlook for two reasons.

Firstly, the break below 2441 would trigger a double top pattern on the monthly chart (marked by the 2018 and the 2021 highs), possibly opening the way at least towards the 2013 low of 1850. Secondly, it would mark a break below the bottom of a seven-year range, potentially leading to a rise in volatility as the index finds a new equilibrium. On the upside, the index needs to break above the August low of 3155 at the very least for short-term downward pressure to ease.

— Written by Manish Jaradi, Strategist for DailyFX.com