Hang Seng Index Chart Pattern - Jun 19, '09

When I first looked at the Hang Seng index chart pattern for the week ending June 19, '09, I thought it was a hallucination. The week's trading and the technical indicators were almost identical to that of the BSE Sensex chart pattern.

In the discussion of the BSE Sensex in the previous week, everything looked very bullish but I had sounded a note of caution because of the 14 weeks long rally without a correction. Likewise, in the previous week's discussion of the Hang Seng index chart pattern, the rally looked like it will continue some more, but I observed the negative divergence of the RSI lower tops.

I was reminded of the comment made by my investment banker friend from Singapore, that the Hang Seng index doesn't have a mind of its own, but follows China and India. And so it did, as we will be able to see from the 6 months bar chart pattern below:-

The Hang Seng index slipped below the support of its 20 day EMA on Thursday. Ever since the rally began in Mar '09, the index had sprung back upwards every time it came near the short-term average.

It tried to pull back towards the 20 day EMA on Friday, but again closed below the short-term moving average. The bigger concern is that the week's trading pierced through the up trend line that was also supporting the rally for the past three months.

Volumes should have fallen with the correction, but it remained high. The RSI has gone below the 50% mark. The slow stochastic fell from the overbought zone to below the 50% level. The last two occasions it did so - in Jan '09 and Mar '09 - it went all the way down to the oversold zone. The MFI is resting on the 50% level. The MACD is still in positive territory but has moved well below the signal line.

Barring a sudden spurt in liquidity from overseas investors, the Hang Seng index looks like it will correct some more next week. Till it stays above the 200 day EMA, the bull market will remain in force.

Bottomline? If you missed booking profits last week, you can do so early next week. Then wait for the correction to exhaust itself before re-entering.