Stock Index Chart Patterns – Hang Seng, Singapore Straits Times, Malaysia KLCI – Mar 18 ‘11

The previous analysis of Asian stock indices was written three months ago. The Hang Seng and Straits Times indices had formed bearish head-and-shoulders topping patterns, while the KLCI was moving in a downward sloping channel. This is what I had concluded:

‘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.’

Hang Seng Index Chart

The Hang Seng index chart had formed a head-and-shoulders pattern during Oct-Dec ‘10. But instead of falling further after breaching the ‘neckline’ briefly, it bounced upwards. Note the low volumes during the end-Dec ‘10 bounce up – which was a sign of underlying weakness. Volumes picked up in Jan ‘11. The RSI made a higher top, but it was not supported by the other three indicators.

The Hang Seng started trading in a bearish downward sloping channel and received good support from the rising 200 day EMA during Feb ‘11. It has finally broken down below the long-term moving average on high volumes. All four technical indicators are bearish. The index is all set for a decent correction. Note that the 50 day EMA is falling, but remains well above the 200 day EMA. The ‘death cross’ will confirm a bear market.

Singapore Straits Times Index Chart

The Singapore Straits Times index had also formed a bearish head-and-shoulders pattern during Oct – Dec ‘10, but bounced upwards without penetrating the ‘neckline’. Upward bounces from a support level can be used to add, provided there is volume support. Note the volume bars in end-Dec ‘10 – they were lower than the volumes during the earlier part of the month.

The break down in the Straits Times index, which was one of the better performers among Asian indices in 2010, has been sharper. The index breached the 200 day EMA in Feb ‘11, bounced up to find resistance from the falling 50 day EMA, and has dived below the long-term moving average on strong volumes. The technical indicators are bearish, and another 10% drop from current levels won’t be a surprise. The ‘death cross’ is imminent.

Malaysia KLCI Index Chart

The Malaysia KLCI index, which was looking the strongest of the three indices 3 months back, proved its strength by breaking above the downward sloping channel on strong volumes. It reached a new high in Jan ‘11, but could not sustain there very long.

The index is below its 50 day EMA, and trading in a downward sloping channel once again. However, it has still not tested support from the 200 day EMA. The technical indicators are less bearish. The index may continue to trade within the downward sloping channel for a while.

Bottomline? The chart patterns of the Asian indices are undergoing varying degrees of corrections. Take some profits home, if you haven’t done so already. Technical analysis remains an art, and not a science. The point to note is that once bearish patterns develop, they indicate a sign of weakness – even if that weakness does not lead to an immediate crash. Volumes and technical indicators often act like a window to the unfolding scenario.