Stock Index Chart Patterns - Shanghai Composite, Malaysia KLCI, Hang Seng - Jul 30, '10

Shanghai Composite index chart

In last week’s analysis of the Shanghai Composite index chart pattern, I had mentioned that any resistance from the falling 50 day EMA would be a temporary one, as the technical indicators were all showing positive divergences that pointed to further bullishness.

The index hovered near the medium-term EMA for the first two days of the week before decisively moving up, and above the 2600 level after 2 months. It remained above 2600 till the end of the week, closing with a 2.5% weekly gain.

The bull rally has lasted 4 weeks and still the index is well below the falling 200 day EMA. The slow stochastic is inside the overbought zone. The MACD is above the signal line and rising in positive territory. But the RSI has dipped after touching its overbought zone, and the ROC has drifted lower after almost reaching the 200 level. The latter two indicators are showing negative divergences that could lead to a pause in, if not a correction to, the up move.

The bears remain in charge as long as the Shanghai Composite remains below its long-term moving average.

Hang Seng index chart

The Hang Seng index chart pattern has broken through the bear shackles as it rapidly climbed over one barrier after the other – first the 200 day EMA, next the Jun ‘10 high of 20957 and finally, the 21000 level.

But the bulls are not out of the woods yet. The Apr ‘10 top of 22389 is more than 1350 points (6%) above the week’s closing level of 21030. The bull rally has lasted 2 months – making a pattern of higher tops and higher bottoms. But the volumes have been muted at best. Without volume support, the rally may fizzle out before testing the Apr ‘10 top.

The technical indicators are bullish, but giving mixed signals. The slow stochastic is in the overbought zone and the MACD is above the signal line in positive territory. But the ROC has dipped after touching the 1000 mark and the RSI has slipped after reaching the overbought zone.

Malaysia (KLCI) index chart

In my previous analysis of the Bursa Malaysia (KLCI) index chart pattern, I had observed the lack of volume support as the index rallied from a fall below the 200 day EMA to climb above all the three EMAs. It was no great surprise that the index dropped below the entangled 20 day and 50 day EMAs.

This time, the bulls mustered up enough volume support and the rally has been much stronger, not only taking the index back to bull territory but making new daily and weekly closing highs. All three EMAs are rising with the index above them.

The technical indicators are bullish, but giving mixed signals in the KLCI index also. The slow stochastic is well inside the overbought zone. The MACD is above the signal line in positive territory, but has stopped rising. The ROC is drifting down after touching the 50 level. The RSI is moving sideways just below the overbought zone.

Bottomline? The bear grip is definitely loosening from the Asian indices. The Shanghai Composite index is still in a bear market, but the Hang Seng and Malaysia KLCI are back in bull territory. Time for some selective buying, but don’t bet the farm. The developed economies are nowhere near full recovery yet.