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The Hang Seng Index technical analysis: coronavirus generates headwinds for prices

By David Becker

The Hang Seng Index predictions will depend on whether the virus spreads

The Hang Seng index continued to roll over during the third week of January and appears to be headed for the worst week since July of 2019 when the Hang Seng dropped more than 5 per cent. The drop in riskier assets comes as Chinese authorities have placed two different Chinese cities on lockdown to mitigate the spread of the Chinese coronavirus. Ahead of the breakout, the Hang Seng had hit a 10-month high as economic data started to point to a rebound. Additionally, the signing of the US-Chinese phase-one trade deal had created tailwinds for the Hong Kong stock market.

Have we seen this before?

When the SARs virus spread across east Asia in 2003, it reduced GDP in the region by 0.5 per cent to 1 per cent according to the Australian government. The Heng Seng initially declined in the wake of the SARs announcement but then started to rally along with other global markets as world economies awoke from a recession.

Has the trade deal buoyed the Hang Seng?

Ahead of the announcement of a coronavirus, the Hang Seng was outperforming following the signing of a phase-one trade deal. President Trump is in the process of discussing the tariffs that are threatened for December 15. The conflicting signals from the officials may be designed to keep the pressure on Chinese negotiators. However, the market appears to assume, for the most part, that new levies will be delayed. This means that the implementation would likely elicit a more dramatic response than the suspension.

What do the technicals say?

The Hang Seng index technical analysis shows that prices gapped lower at the beginning of the week when the virus scare was initiated. Prices have traded lower and they continue to face headwinds. Short term resistance on the Hang Seng is the gap opening which coincides with the 10-day moving average seen near 28,622. The first level of daily support for the Hang Seng is seen near the 50-day moving average at 27,516. The larger picture shows that prices are in an uptrend but in the short term there is likely to be a further pullback to moving average and trend line support that comes in near 26,500.

Short-term momentum is negative as the fast stochastic continues to dive lower. The fast stochastic is printing a reading of 20, just above the oversold trigger level. Readings below 20 are considered oversold while a reading above 80 is considered overbought. The RSI appears to be heading lower which reflects accelerating negative momentum. Medium-term momentum has turned negative as the daily MACD (moving average convergence divergence), recently generated a crossover sell signal. This occurs when the MACD line (the 12-day moving average minus the 26-day moving average) crosses below the MACD signal line (the nine-day moving average of the MACD line). The MACD histogram is printing in the red with a declining trajectory which points to lower prices.

The weekly chart of the Hang Seng is very ugly and represents a strong rejection of higher levels. Price action is negative as prices have generated an outside week. This is a higher high, a lower low and a lower close which is generally considered a reversal pattern. Momentum is negative. The fast stochastic generated a crossover sell signal in overbought territory. The signal was generated near 93 and the current reading is 83, both above the overbought trigger level of 80 which could foreshadow a correction.

Hang Seng index predictions: outlook

The Hang Seng Index predictions are predicated on whether the coronavirus spreads through different Chinese cities, making investors skittish. Stock investors will likely refrain from adding new capital to riskier assets.

Prices are headed to support near 27,500 and 26,450. Traders that are bullish could consider taking a long position at these levels. These levels should hold unless the market is convinced that the current rebound in economic growth in the wake of the phase-one trade deal will be derailed by the Chinese Coronavirus.

The upward trend in prices should remain in place after a dip as low global interest rates and a rebound in economic growth should point to more attractive riskier assets such as the Heng Seng.

FURTHER READING: What is the coronavirus and how could it affect stock markets?

FURTHER READING: China confirms coronavirus is spreading as death toll hits nine

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