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Saturday, December 18, 2010

Stock Index Chart Patterns – Hang Seng, Singapore Straits Times, Malaysia KLCI – Dec 17 ‘10

Hang Seng Index Chart

HangSeng_Dec1710

Five weeks ago, the Hang Seng index chart pattern was correcting after touching a new high of 24988. The technical indicators were looking bullish and I had suggested that investors should use the dip to add, but to maintain adequate stop-losses.

The benefit of setting stop-losses, particularly near new highs, can be seen from the Hang Seng chart above. The index has formed a bearish head-and-shoulders topping pattern with a downward sloping neckline. The neckline and the 100 day EMA were both breached intra-day on Thu. Dec 16 ‘10 and Fri. Dec 17 ‘10, but the index did not close below the neckline. That may be a small mercy.

Note the lower tops formed on the MACD and RSI as the index rose from the left shoulder to the head of the pattern. All four technical indicators are bearish. The MACD and ROC are both in negative territory. The RSI has slipped below the 50% level. The slow stochastic has entered the oversold zone.

A technical breach of the neckline seems imminent. Should that happen, the index may drop well below the 200 day EMA and head down to the 20000 level. That could lead to a trend reversal. Long-term investors can set a stop-loss at 21900.

Singapore Straits Times Index Chart

Straits Times_Dec1710

The chart pattern of the Singapore Straits Times index is also displaying a bearish head-and-shoulders pattern. The difference with the Hang Seng is that the neckline has not been breached yet. Head-and-shoulders patterns often do not play out as expected, but the volumes are in favour of a deeper correction.

The technical indicators are looking bearish, but are in slightly better condition than those of the Hang Seng. If the index drops below the neckline, it can fall to 2900 (below the 200 day EMA). The height of the top of the head from the neckline is subtracted from the level of the neckline to arrive at the downside target. 

Malaysia KLCI Index Chart

KLCI Malaysia_Dec1710

The Malaysia KLCI index chart pattern is looking the most bullish among the three Asian indices, but is facing bearish headwinds. The index has been trading in a downward sloping channel since hitting a top of 1532 in Nov ‘10, but remains above the long-term support-resistance level of 1480 and has not closed below the 50 day EMA since Jul ‘10.

The ROC has dropped into negative territory, but the MACD is still positive. The RSI and the slow stochastic are both above their 50% levels – but barely. The index may trade within the downward sloping channel for a while.

Bottomline? The chart patterns of the Asian indices are undergoing corrections. The Hang Seng and Straits Times indices may test or even breach their 200 day EMAs. The KLCI looks more bullish and may not face as deep a correction. Investors may wait for the correction to play out. Any upward bounces on strong volumes from the necklines of the head-and-shoulders patterns (in the Hang Seng and Straits Times) or the lower end of the channel (for the KLCI) can be used to add.  

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