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Hang Seng index technical analysis: February forecast

By David Becker

For the balance of February, the index is likely to drift upward testing the 29,000 level

The Hang Seng index has struggled in 2020 and is almost unchanged year to date. This follows a 9 per cent rally in the Hong Kong index in 2019. Negative news on the coronavirus has kept risk appetite subdued. The impact of the coronavirus is still unknown, and it could continue to erode growth in Asia and spread to the rest of the world.

To combat slowing growth, China’s commercial banks cut rates overnight, passing on the PBOC’s monetary support to counter the virus shock. The Chinese banks cut the 1-year Prime Rate by 10 basis points to 4.05 per cent and the 5-year rate was cut by 5 basis points to 4.75 per cent. The smaller cut for longer rates is consistent with the PBOC’s focus on providing liquidity.

HSI technical analysis

Despite the efforts by the Chinese central bank to prop up Asian growth, the Hang Seng has struggled. Prices continue to trade sideways and are currently in an upward sloping range that is capped near the 29,000 level with a floor near 26,300. Short-term support is seen near both the 50-day moving average at 27,762 and the 10-day moving average at 27,635.

The 10-day moving average is poised to cross above the 50-day moving average which means that a short-term uptrend will soon be in place. This likely means that prices are poised to test the upper end of the range near 29,000. The last two crossover buy signals that have occurred while the Hang Seng has been in this relatively tight range have signalled a move to the top end of the trading range.

Short-term momentum has turned negative as the fast stochastic, which is a momentum oscillator, has generated a crossover sell signal. This crossover sell signal occurred in overbought territory. Readings on the fast stochastic above 80 are considered overbought while reading below 20 is considered oversold. The current reading is 76, as the fast stochastic moved out of overbought territory which reflects accelerating negative momentum. The daily relative strength index is moving sideways and is printing a reading of 50, which is in the middle of the neutral range and reflects consolidation.

Medium-term momentum is neutral as the MACD (moving average convergence divergence) histogram is printing in the black with a declining trajectory which points to consolidation.

The weekly chart of the Hang Seng is also neutral as prices are in the middle of a weekly range capped and floored by the same levels. The one caveat is that the fast stochastic on a weekly chart has generated a crossover buy signal. The crossover was created in the middle of the neutral range and the rise in the fast stochastic reflects accelerating positive momentum. The MACD histogram is moving sideways in a neutral line which reflects consolidation.

Hang Seng index predictions: bottom line

The Hang Seng is rangebound and faces headwinds as economic growth has likely slowed due to the spread of the coronavirus. The technicals point to a rangebound market that is likely to test the top end of the trading range following a moving average crossover buy signal. For the balance of February, the Hang Seng is likely to drift upward testing the 29,000 level.

FURTHER READING: China gradually returns to work amid coronavirus disruptions

FURTHER READING: Financial markets in Europe and the US kept afloat amidst coronavirus drug hopes

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