Last week's Hang Seng index chart pattern looked like it was getting ready for a correction because of the dip in volumes and the weakness of the technical indicators. The index was near its 20 day EMA, which had provided support ever since it was penetrated in Mar '09.
The 3 months bar chart pattern of the Hang Seng index will show that the 20 day EMA provided strong support once again:-
(Please right-click on the image; open it in a new tab or window for a better view.)
The upward bounce from the short-term average wasn't entirely unexpected. But the striking feature was the sudden upsurge in volumes.
Volume is supposed to move with the index, and go up when the index moves up. However, a sudden increase in volumes can also indicate a 'buying climax' which indicates the formation of a market top. This usually happens at the end of a fairly long rally - just like the one we have had so far.
Unfortunately, technical analysis can't distinguish the difference between a surge in demand from genuine investors, and a desire by market operators - particularly bears - to create a temporary buying surge to trap the bulls.
Next week's trading ought to clear up the mystery of the sudden volume increase. The slow stochastic has moved back into the overbought zone. The MACD, ROC, RSI have all risen with the index. But all the indicators have made lower highs. This is a negative divergence between the Hang Seng index and its technical indicators.
Bottomline? Time to be a little cautious. Let your profits ride, but keep maintaining trailing stop losses on your stock investments. Partial profit booking is also recommended.