Stock Index Chart Patterns – Hang Seng, Singapore Straits Times, Malaysia KLCI – Apr 08 ‘11

In last month’s analysis of chart patterns of the Asian indices, the Hang Seng was trading just below its 200 day EMA; the Straits Times had dropped well below its 200 day EMA and the ‘death cross’ (50 day EMA crossing below the 200 day EMA) seemed imminent; the Malaysia KLCI was trading in a downward sloping channel below its 50 day EMA. Technical indicators were looking bearish, and I concluded that the corrections in the three indices were likely to continue.

Technical analysis deals with probabilities – not certainties. Interpretation of chart patterns is more art than science, as it is based on prior patterns repeating in future. When patterns don’t turn out as per expectations – is it technical analysis that is fallible, or is it the analyst who misinterpreted the patterns? In this case, mea culpa. I failed to observe the positive divergences in the technical indicators.

Hang Seng Index Chart

The Hang Seng index chart embarked on a sharp ‘V’ shaped recovery the very next day after I wrote my bearish post. Note that while the index slipped below the 200 day EMA to touch a lower bottom in Mar ‘11, the ROC made a flat bottom and both the RSI and slow stochastic made higher bottoms (marked with blue arrows). The positive divergences rang a warning bell for a probable trend change – I just didn’t hear it.

The Hang Seng quickly climbed above its 50 day and 200 day EMAs on good volume support, and has broken out above the down trend line joining the Nov ‘10, Jan ‘11 and Mar ‘11 tops. The technical indicators are now signalling an overbought condition, which could lead to a pullback to the down trend line. The 50 day and 200 day EMAs are rising, and the 5 months long correction appears to be over.

Singapore Straits Times Index Chart

The Singapore Straits Times embarked on a sharp ‘V’ shaped recovery that managed to prevent the ‘death cross’. Note that all four technical indicators touched higher bottoms in Mar ‘11 while the index made a lower bottom.

The volume support wasn’t strong enough to propel the index above the down trend line. The technical indicators are looking overbought, and the ROC has already changed direction. A pullback to the 50 day EMA is likely before the down trend line can be convincingly breached.

Malaysia KLCI Index Chart

The Malaysia KLCI index didn’t even get close to its rising 200 day EMA. The correction started two month’s later, and the bull market wasn’t under any threat. The ROC, RSI and slow stochastic were making flat or higher bottoms during the past three months, while the index was touching lower bottoms. The MACD made a bullish rounding-bottom pattern.

After the index moved above its 50 day EMA, there was a rapid up move on a spike in volumes. But instead of testing or crossing its Jan ‘11 peak, the KLCI seems to have run out of breath. The technical indicators are overbought and hinting at a correction. A pullback to the rising 50 day EMA may precede a breach of the down trend line.

Bottomline? The down trend in the chart pattern of the Hang Seng index appears to have been reversed. The Singapore Straits Times and Malaysia KLCI haven’t quite reversed their down trends yet, but should be able to do so soon enough. All three indices are near their previous tops. Part profit booking after the sharp up moves may be a good idea.