Friday, August 21, 2009

Stock Index Chart Patterns - Shanghai Composite, Hang Seng, Taiwan TSEC - Aug 21, '09

Shanghai Composite index chart

Two weeks back, the Shanghai Composite index chart pattern appeared ready for a bigger fall - specially if the support from the 50 day EMA and the 3100 levels failed. And what a fall it was!

Before we get into the gory technical details, please allow me to digress briefly to a Chaos Theory concept called 'The Butterfly Effect':

'Small variations of the initial condition of a dynamical system may produce large variations in the long term behavior of the system.'

What that means in plain English is: If a butterfly flaps its wings in China, it may cause a tornado in Texas! Further translating into stock market parlance means: If the Chinese stock index catches a cold, stock indices all over the world start to sneeze!

Enough mixed metaphors. Now a look at the 6 months closing chart pattern of the Shanghai Composite index:-


After a 5 months long one way ride up, the Shanghai index came under a vicious bear attack and plummeted through the 20 day and 50 day EMAs before bouncing up from the support at the 200 day EMA.

In doing so, both the short-term and medium-term EMAs have turned down and the 20 day EMA is about to drop below the 50 day EMA. That means weakness in the short and medium term, while the long-term bullishness remains intact.

Before you start getting excited and jump back into the market with both feet, here are some facts. The index made a bull market high of 6124 on Oct 16, '07 and a bear market low of 1815 on Dec 31, '08. The recent high of 3478 on Aug 4, '09 was an almost exact 38.2% Fibonacci retracement of the entire bear market fall of 4309 points.

The 5 months rally, therefore, remains a bull rally in a long-term bear market - till the 50% Fibonacci (3950-4000) and 61.8% Fibonacci (4450-4500) retracement levels are conquered by the index.

The technical indicators are looking weak. The slow stochastic is in the oversold zone. The MFI is below the 50% level. The MACD is negative and well below the signal line. The RSI is about to enter the oversold zone.

Taiwan (TSEC) index chart

The last discussion on the Taiwan (TSEC) index chart pattern was 4 months back on April 12, '09, when the index had completed a bullish rounding bottom pattern, but a correction from the 6000 level was expected.

Let us see where the 6 months closing chart pattern of the Taiwan (TSEC) index is headed:-


The index did correct from the 6000 level (as expected), took support at the 200 day EMA and quickly moved above the 7000 mark. Ever since, it has been in a sideways consolidation pattern with multiple tops in the 7000-7200 level.

That resistance zone happens to be in between the 50% and 61.8% Fibonacci retracement levels of the entire bear market fall from 9786 on Nov 1, '07 to 3955 on Nov 21, '08.

The TSEC has slipped below the 50 day EMA but is still above the 200 day EMA. The slow stochastic is just above the oversold zone. So is the RSI. The MACD is marginally positive but below its signal line. The MFI is below the 50% level.

The technical indicators are pointing to a further correction, but is not looking as weak as the Shanghai composite index.

Hang Seng index

In last week's analysis of the Hang Seng index chart pattern, I had observed that the 21350 level remained the high water mark which the index needed to cross - failing which, the bull market could stall.

The 6 months closing chart pattern of the Hang Seng index has weakened quite a bit but is not looking as bad as its two Asian cousins:-

Hang Seng_Aug2109

The index is playing hide-and-seek with its 20 day EMA, and remains above both the medium-term and long-term averages. The slow stochastic is between the 50% and oversold levels. The MFI is above the 50% level. The RSI has just slipped below the 50% level. The MACD is positive but below the signal line.

The technicals are indicating that the index can correct some more.

Bottomline? All three stock index chart patterns are showing weakness of different degrees, with the Shanghai Composite the weakest, the Hang Seng the strongest and the Taiwan TSEC in between. All three indices have retraced from important Fibonacci levels. Investors may be better off to let the correction run its course before re-entering.


Madhu said...

I am zero in TA.
Sorry to ask a very basic question.
Why is that all TA gives too much imprtance to 200 DMA? Why not 100 or 190 DMA?
What is the significance of 200 DMA? If it is just in the past price movements take a definite turn based on 200 DMA then psychologically why is that happening at the same time with so many investors? (More of behavioural finance)

Subhankar said...

No need to apologise, Madhu. Many well-known investors and fund managers - Peter Lynch comes to mind - get by fine without any knowledge of Technical Analysis.

As individual investors, we don't have the research bandwidth of fund managers. TA helps to level the playing field to an extent. It is hardly infallible.

The 200 DMA has become the de-facto metric for deciding the long-term trend in a stock or index. It's just a nice round number. (Like using 1 KG instead of 453.6 grams as a metric of weight.)