History Hang Seng Index Hong Kong
1999

20th December: The index has pulled back after turning at a point near the previous record peak in mid-1997. Average volume for the market is building nicely. But it is nowhere near what we saw at the peak in 1997. There is therefore a high chance that the index will consolidate at the current level while disappointed investors sell out and new investors buy into the market.

We have a valid reverse head and shoulders with target just under 22,000. The index pulled back last Thursday to the neckline of that pattern. It rebounded on Friday. If this pattern works, as I expect it will, we could see another pullback. But after that, the index should break the horizontal resistance at 16,500.

Current prediction

Short term: none

Medium term: none

Long term:
1. A double bottom points to around 17,300. Nearly at target.
2. A reverse head and shoulders points to just under 22,000 - around 21,700.

26th November: The index reached our target of 15,500. If good volume continues, we should expect, before too long, a breakout from our pattern pointing to 22,000. But in the short term, a correction is likely. If not now, then at 16,400.

Current prediction

Short term: none

Medium term: none

Long term:
1. A reverse head and shoulders pointing to 15,500 - high probability
2. A double bottom points to around 17,500. Volume in the market is not encouraging.

22nd November: The index is on the verge of breaking out of a pattern that points to 22,000. But there is resistance at the current level and, more importantly, at 16,400. Volume is picking up and resistance has been broken on the average volume charts. But there is still a way to go before volume from 1997 is passed. Horizontal resistance theory suggests that this past volume will present obstacles as disappointed investors from the 1997 rally await an opportunity to break even and get out of the market.

Current prediction

Short term: double bottom points to 15,500

Medium term: none

Long term:
1. A reverse head and shoulders pointing to 15,500 - high probability
2. A double bottom points to around 17,500. Volume in the market is not encouraging.

15th November: The index broke a key resistance at 14,200 last Friday, confirming our target of 15,500. If this level is sustained, we can confirm the end of the long term bearish trend that started with the fall from 17,000, in 1997. Volume is picking up. But it is nowhere what it was in 1997.

Looking at the build-up of volume now, compared to the volume in 1997, it appears as though a huge portion of the market has evaporated. Read my note at the bottom of the page, if you have not yet done so. It suggests that the government purchase last year might have changed the volume picture for the market. If that is the case, I might be suffering unnecessary low volume anxiety.

Current prediction

Short term: double bottom points to 15,500

Medium term: none

Long term:
1. A reverse head and shoulders pointing to 15,500 - high probability
2. A double bottom points to around 17,500. Volume in the market is not encouraging.

8th November: The index is looking bullish. A double bottom could soon pave the way to 15,500. However, there is strong resistance at 14,200 to overcome. Average volume is facing resistance.

Current prediction
Short term: reverse head and shoulders 14,200
Medium term: none
Long term:
1. pointing to 15,500 - still valid
2. A double bottom points to around 17,500. Volume in the market is not encouraging. Cancelled if the index falls below 12,000.

25th October: The short and medium term charts are still throwing out confusing signals. Our double top pointing to 12,100 was cancelled two weeks ago. But then the index fell to that target and rebounded. A triple top pointed to 10,500. But that was cancelled last Friday.

The long term picture shows a more persuasive scenario: our double bottom pointing to 17,500 is valid and the recent months of consolidation appear as a mere series of pullbacks to the neckline of the pattern. But it is not a good pattern, due to poor volume. On the other hand, average volume has been building since September. It is now on resistance. If volume picks up this week, there would be greater evidence to support our hopes for 17,500.

The crucial support is the neckline for the long term pattern. This neckline around 12,000. If it breaks, we cancel the 17,500 and look to a target below 10,000.

Current prediction

Short term: none

Medium term: none

Long term:
1. pointing to 15,500 - still valid, but should be considered doubtful if the support at 12,200 fails.
2. A double bottom points to around 17,500. Volume in the market is not encouraging. Cancelled if the index falls below 12,000.

11th October: Last week's activity paints a rosier picture for the index than that of the previous week. We have seen the short term double top pointing to 12,100 cancelled. We can also see a triangle scenario, which could explain the falling volume within a bullish, consolidation context.

Many individual stocks still look bearish, especially red chips. But CLP looks promising. The chart is shown below.

Current prediction

Short term: double top points to 12,100 - cancelled.

Medium term: none

Long term:
1. pointing to 15,500 - still valid, but should be considered doubtful if the support at 12,200 fails.
2. A double bottom points to around 17,500. Volume in the market is not encouraging. Cancelled if the index falls below 12,000.

4th October: The index is on a long term support which, if it fails, could continue a bearish trend that could see a fall to around 10,000. On the other hand, our long term bullish targets are valid. The weekly chart is still well supported in a bullish channel. And the long term fund chart is well supported. The index should be considered to be at a crossroads. With luck, this week will give a better indication of direction.

Current prediction

Short term: double top points to 12,100.

27th September: Our bull is in danger of shrinking away. We now have a little double top pointing to 12,300. This level is below the neckline of a larger pattern that would point to 10,200. Thus if the target of the double top is reached, we will have a valid target of 10,200.

There is a chance that these bearish clouds will be blown away. A rally above 13,100 this week will cancel the bearish picture.

If the index keeps falling, the crucial level is the 12,000 support on the daily chart and the 12,200 on the weekly chart.

Current prediction

Short term: double top points to 12,300.

Medium term: none

Long term:
1. pointing to 15,500 - still valid, but should be considered doubtful if the support at 12,200 fails.
2. A double bottom points to around 17,500. Volume in the market is not encouraging. Cancelled if the index falls below 12,000.

20th September: Last week saw a few days of encouraging volume and the formation of a third falling wedge, suggesting a possible rally to 11,000 and beyond (11,350) in the short term.

Our long term prediction of 11,750 is at best a medium-level probability. The Dow could go either way, but more likely up. Support would be at around 10,000.

Current prediction

Short term: our falling wedge points back to 14,500. Good volume supports the chances.

13th September: The short term picture looks good. A target of 15,000 is clear and valid. Volume supports it. But the long term resistance at 14,200 - 14,300 will be the big test of the long term trend of this market, which is still labouring under low volume.

Current prediction

Short term: reverse head and shoulders points to 15,000. Good volume on breakout. Good chance.

Medium term: none

Long term:
1. pointing to 15,500
2. A double bottom points to around 17,500.

30th August: The short term looks bullish, provided the index stays above 13,500. Good volume will be needed to get over the long term resistance at around 14,200 - 14,300.

Current prediction

Short term: wedge and double bottom give a good chance of a return to the previous recent high, around 14,500

Medium term: a double top is cancelled by the breakout of the index from a falling wedge

Long term:
1. pointing to 15,500
2. A double bottom points to around 17,500.

23rd August: The falling wedge defeated the double top. Good volume attended the breakout from the wedge, giving a good chance of a return to 14,500 or thereabouts. However, the final long term resistance is hovering around 14,300. This will be one of the final tests for the index.

Current prediction

Short term: wedge gives a good chance of a return to the previous recent high, around 14,500

Medium term: a double top is cancelled by the breakout of the index from a falling wedge

Long term:
1. pointing to 15,500
2. A double bottom points to around 17,500.

16th August: Targets for the index and the fund chart are dubious or cancelled. But the long term index target of 17,500 is still valid, provided the index remains above 12,000. The bearish target of 10,800 could be interrupted by a falling wedge.

Current prediction

Medium term: a head and shoulders top points to 10,800. But a falling wedge could interrupt the target.

Long term:
1. pointing to 15,500 - in doubt
2. A double bottom points to around 17,500.

9th August: The index is still holding above support. 12,900 is the next crucial support.

2nd August: The short term is ambiguous. But the long term still looks good. The long term fund chart has made a very fine pullback and turn on the neckline, confirming the long term reversal. All we need now is a bit more volume.

Current prediction

Short term: two patterns pointing in opposite directions give an ambiguous short term outlook.

Long term:
1. pointing to 15,500, which should be reached soon
2. A double bottom points to around 17,500.

The long term fund chart confirms the index reversal.

19th July: The index pulled back to some safe supports. If it turns at the current level our target of 15,500 could soon be reached. If it keeps falling, we will have a short term prediction of 12,400 with support at 12,700. Volume in some of our stocks is not good. Volume for the index is picking up slightly. But it is still not yet over the 50 day moving average resistance. See the long term daily chart below.

Current prediction

Short term: a short term reverse head and shoulders points to 16,000 - cancelled

Long term: two long term reverse head and shoulders patterns:
1. pointing to 15,500, which should be reached soon
2. pointing to 20,000 as early as the fourth quarter of this year.
3. A double bottom points to around 17,500.
4. A weekly reverse head and shoulders points to 18,200.

12th July: A short term pattern pointing to 16,000 looks promising, suggesting that the target of 15,500 could soon be reached. Resistance on the long term weekly chart is at 15,200, which could either precede or come after target.

Current prediction

Short term: a short term reverse head and shoulders points to 16,000.

Long term: two long term reverse head and shoulders patterns:
1. pointing to 15,500, which should be reached soon
2. pointing to 20,000 as early as the fourth quarter of this year.

28th June: Will the bull reach 20,000 this year? Good question.

Answer: probably not this year. But there is a good chance that the index will see this level in the first quarter of next year, provided volume picks up.

In one of the charts below, I have plotted the fifty day moving average for turnover of the Hongkong Stock Exchange. The critical level is the HK$10 billion per day level. This has been a major resistance throughout much of the bear market, commencing at the end of 1997 - including the surge of volume attending the government's intervention.

The index has been doing remarkably well on unimpressive volume. (On that score, see my notes at the bottom of this page). It broke out of a reverse head and shoulders in April. The index was then at around 11,000. The prediction was 15,500. The index is now more than half way to target. This is a good sign. But the journey has been fraught with uncertainty, due to low volume. It is an example of a medium probability turning out according to our hopes. If the market sees more volume, and the index proceeds to 20,000, it would be a case of the index moving according to our expectations, as is the case in other markets such as Korea, Philippines, Singapore and now, even Jakarta, where volume is good.

As I mention in my note below, the low volume could be a result of the government intervention last year, sucking up a significant percentage of supply in the market. If that be the case, a great disservice to the trading community has been achieved. The government might have prevented the market falling below 6,500. But to what gain (not counting a whopping profit of nearly 100%)? The market would have rebounded by itself. It had already passed the low of 6,500. The end result of the government's intervention has been to muddy the waters of analysis and, possibly, deprive us of the degree of probability that might otherwise have attended the rally.

There will also be the pay back. When the government sells off its holding, prices must fall. Bitter medicine. But the sooner the better. Then we can get back to having confidence in technical indicators.

Oh! One more little thing. Second liners fell last week, as often occurs during a rally in the blue chips, suggesting a possible surge again this week.

Current prediction

Short term: a short term reverse head and shoulders points to 14,300 and another could point to 16,000.

Long term: a long term reverse head and shoulders pointing to 15,500, but probably not before a correction to as low as 10,500.

21st June: Today's breakout confirmed the short term target of 14,250, broke the long term resistances and, provided volume builds to HK$20 billion per day, over the next month or two, will give a valid target of 20,000 or thereabouts.

Current prediction

Short term: a short term reverse head and shoulders could point to 14,250.

Long term: a long term reverse head and shoulders pointing to 15,500, but probably not before a correction to as low as 10,500.

14th June: Volume last week was not encouraging. But Thursday and Friday saw a nice increment to the previous days' average. If this picks up, and if the index rallies another one or two hundred points, we could have a short term prediction of 14,000. But there is important long term resistance at 13,600.

If the rest of the region were not in bull mode, I would say that there is a fifty fifty chance that the index could fail here and return to 9,500 by August or September. But the Asia chart, which has a substantial Hongkong element, looks bullish, as does the rest of the region. The interest rate outlook in the US also looks like it could have an adverse effect on the market.

Sounds a bit uninspiring. But at least we can report that those bearish targets of 11,800 and 10,800 are cancelled.

Current prediction

Short term: a short term reverse head and shoulders could point to 14,000. Confirmation would come in the form of a closing at 13,200 on volume of 9 billion or higher.

Long term: a long term reverse head and shoulders pointing to 15,500, but probably not before a correction to as low as 10,500.

7th June: The market could have hit a short term bottom. Looks like the support at 12,000 has held the market. But before we can be confident that the market has turned, we need to see a rally with volume around HK$ 8, 9, 10 billion per day. Last Friday's turnover of HK$4.7 was not at all encouraging. Let us wait, hope and see what this week brings.

Current prediction

Short term: double top points to 11,800; reverse head and shoulders points to 10,800, but a wedge could save it

Long term: a long term reverse head and shoulders pointing to 15,500, but probably not before a correction to as low as 10,500.

31st May: The short term is ambiguous. On one hand the index has reached a good support at 12,000 and individual stock charts such as Cheung Kong and Amoy show support on the neckline of their respective reversal patterns.

On the other hand, there is no good support at the current level on the weekly chart nor in the fund chart, suggesting that the 12,000 support might fail. If it does, we are looking at around 11,600 to 11,800 or 10,500 for medium term support.

Current prediction

Short term: double top points to 11,800; reverse head and shoulders points to 10,800, but a wedge could save it

Long term: a long term reverse head and shoulders pointing to 15,500, but probably not before a correction to as low as 10,500.

24th May: The index is now in correction mode. The question is, how far will it fall before making a bottom?

The index chart gives two possible scenarios: first, between 11,600 and 12,000; secondly, around 10,500.

Take a look at the charts for Cheung Kong and Amoy. They each have reversal patterns. The price of each stock has pulled back to the neckline of each pattern. If these necklines don't hold, it's quite likely that we will see the index fall to the lower range of 10, 500 before there is a chance of consolidation.

Remember that the Hang Seng index is alone in Asia in not having good volume accompanying the recent rally. A good fall to 10,500 would be a chance for a new rally with good volume.

 Current prediction

Short term: double top points to 11,800

Long term: a long term reverse head and shoulders pointing to 15,500, but probably not before a correction to as low as 10,500.

10th May: Last Friday's plunge did not fall below the critical medium term support. If the index falls below this support, my long term reversal scenario shown in green below has a chance of happening. A correction could take the index as low 10,500, making a right shoulder for a breakout that would confirm a target of 19,500.

If the index recovers without correcting, it could march on to target at 15,500. The blue chip New World Development has broken out of a beautiful pattern and shows no sign of correcting more than a few dollars. The chart is shown below. Other stocks such as HSBC, China Light and Power and Hang Seng Bank have made double tops. But they reached the minimum target for their respective patterns. No further falls can be predicted for these stocks. Other stocks are making larger double top patterns. These include property stocks such as Hysan and Sun Hung Kai and Swire Pacific A. They could indicate an impending correction in the market.

Rising US interest rates might also suppress the exuberance of the Hongkong market. See the Dow page for an analysis of the reversal of the long term interest rate trend in the US. 7% on the long bond is possible by the end of the year.

 Current prediction

Short term: none

Long term: a long term reverse head and shoulders pointing to 15,500, but probably not before a correction to as low as 10,500.

3rd May: The index broke a medium term resistance last Monday and then spent the rest of the week consolidating above it. Theory states that a resistance once broken becomes a support. Thus there is a good chance that the index will not correct below 13,000 and that the market will advance to its next target of 15,500 without interruption. The weekly chart supports this interpretation. And the fund charts also throw out bullish signs. The long term chart could soon see its last long term resistance break.

However, the market has not yet shown volume that clearly imbalances the market activity during the previous bear-trap rallies. In the absence of clear indications in other Asian markets, one would have cause to be suspicious of the current rally. But the chances are remote that Hongkong, alone in Asia, is undergoing a bear rally while other Asian markets are showing genuine long term reversals. It is more likely that Hongkong is in a bull market but, for some reason, is not showing the same level of activity as other markets.

Government's intervention last August might have reduced supply: In the absence of a correction at the current level, another explanation must be sought for the unabated bull. I speculate that perhaps the government's shopping spree last August has reduced supply in the market such that we cannot see the necessary surge of volume that one would expect in order to confirm a reversal from bear to bull market.

Theory states that demand must increase before prices rise. There is a corollary. Supply could decrease. The government spent HK$80 billion last August when the market was cheap. That would have bought a lot of shares and so soaked up a fair portion of the market. The same amount of money now would only do half the damage that it could do then. Thus it could be argued that HK$80 billion last year would equate to HK$150 billion - or five to ten high volume trading days now.

It should be noted too that the shares that the government has purchased are not circulating. Thus, while the government's purchase only mopped up a few percentage points of the total market of shares, it might have taken out of circulation a significant chunk of the supply of shares that usually churns back and forth, day to day, among speculators.

I have no way of measuring the effect of the government's purchase. It might explain the rally on low volume. It might not. But it distorts the picture that allows us to make educated guesses in a free market.

Current prediction

Short term: none

Long term: a long term reverse head and shoulders pointing to 15,500, but probably not before a correction to as low as 10,500.

26th April: Last Friday, the market has hit a triple resistance, and possibly made a Day Reversal. Chances are that the market could correct to as low as 10,500, before rebounding. If a rebound occurs on volume exceeding the current level, there is a good chance that the market could break out of a new pattern pointing to 18,800.

However, if supports at 10,500 fail, we should also consider the downside scenario, which is 5,000 by next May. Technically, the market is still in a long term bear trend. The reversals to date have not been as impressive in volume as those of Korea and, now, Singapore. However, the strong volume of last week - HK$14 billion on both Monday and Friday - make this scenario a low probability outcome. A correction, followed by a rally on strong volume, will further reduce this spectre.

Current prediction

Short term: none

Long term: a long term reverse head and shoulders pointing to 15,500, but probably not before a correction to as low as 10,500.

19th April: A surge of volume approached HK$12 billion last Friday. This is encouraging. But it is still not sufficient to give confidence that the market will reach 15,500. Chances will improve if the long term weekly resistance at 13,200 passes on sustained, high volume of HK$15 billion per day.

Current prediction

Short term: reverse head and shoulders points to 13,100. Good chance if the resistance at 12,100 breaks.

Long term: a long term reverse head and shoulders pointing to 15,500 but with low volume and therefore not yet confirmed.

14th April: The bull market is with us. But it's a tentative visit. Volume has picked up. But it is not sufficient to inspire confidence. Compare the long term daily charts for the Nikkei and the Korean KOSPI to get an idea of what a good reversal looks like.

Nonetheless, history has shown the Hang Seng to be a cunning market, with volume building up after the breakout. Check out my Lesson from Hang Seng History, if you haven't already. It's at the bottom of the page. It shows a reversal in 1996 that occurred on low volume.

We are therefore left with a modicum of uncertainty. However, if the market gets above the current resistance and heads for 13,100 on volume surpassing HK$12 billion day, we can raise our hopes.

Current prediction

Short term: reverse head and shoulders points to 13,100. Good chance if the resistance at 12,100 breaks.

Long term: a long term reverse head and shoulders pointing to 15,500 but with low volume and therefore not yet confirmed.

26th March: We now have a bullish and a bearish scenario for the index. I suppose that the bear, being bigger, is more likely to win against the bull. In other words, volume does not support a bullish scenario. But it sure does support a bearish scenario. Let's hope we have a clearer picture in mid-April by the time of the next update.

Current prediction

Medium term: double bottom points to 12,400. But the target is only likely to be reached if volume starts to pick up to at least HK$8 billion per day. If we see 10 billion we can start feeling confident.

Long term: a long term reverse head and shoulders pointing to 15,500 but with low volume and therefore not yet confirmed.

22nd March: The index has broken out of a short term double bottom that points to 12,400. But there is strong horizontal resistance at 12,000 which will create a great impediment unless volume starts to soar. I am still not persuaded by the current rally. Volume is building. But it is still dwarfed by that of the first and last quarters of 1998. It is therefore unlikely that we are seeing a long term reversal taking place. The double top scenario, with neckline at 9,000 and target at 7,000 is still a real possibility.

Current prediction

Medium term: double bottom points to 12,400. But the target is only likely to be reached if volume starts to pick up to at least HK$8 billion per day. If we see 10 billion we can start feeling confident.

Long term: a long term reverse head and shoulders pointing to 15,500 but with low volume and therefore not yet confirmed.

15th March: The index broke out of a long term reverse head and shoulders pointing to 15,000. But the chances of the market reaching this level are low if the volume does build up in the next two or three weeks. 8 - 10 billion HK dollars per day would be a good start. But double that amount would be required to move the market to target.

Current prediction

Short term: none

Long term: a long term reverse head and shoulders pointing to 15,000 but with low volume and therefore not yet confirmed.

8th March: Short term gains may be expected. But volume is still trending down. This is dangerous. It suggests that the current rally could merely be setting the stage for a bigger fall. We could even see a fall back to 7,200. All depends on volume over the next few weeks.

Current prediction

Short term: a pennant could take the index to the long term resistance at 10,600

Long term: none, but the long term trend is still down

Currency: "A speculator would need at least 10 times the amount of money to move interest rates by a magnitude similar to that of last year." - Edmund Harriss, Guinness Flight, Hong Kong, 26 January 1999

1st March: The index rebounded above the neckline of our head and shoulders top, yesterday March 1st. But today, the index fell below the neckline again. One day above the neckline is not enough to cancel the prediction. The greater probability is that the pattern will work. (I have never seen a good head and shoulders top in Hongkong fail. And the short term pattern below is a good one.)

Current prediction

Medium term: double head and shoulders top pattern pointing to 8,420 (logarithmic target at 8,570)

Long term: none, but the long term trend is still down

15th February: The index rebounded last Friday after touching the support at around 9,000. However, volume was weak. And the higher target of 8,4250 is still valid. There is also a good chance that the index will make a new right shoulder and that we will see a target lower than 7,750.

The rebound of 3% on Friday might have been a surprise. But the volume on that day was not. Turnover last Friday was a mere HK$3 billion. Not the sort of volume that moves markets.

Current prediction

Medium term: double head and shoulders top pattern pointing to 8,420 (logarithmic target at 8,570)

Long term: none, but the long term trend is still down

Currency: "A speculator would need at least 10 times the amount of money to move interest rates by a magnitude similar to that of last year." - Edmund Harriss, Guinness Flight, Hong Kong, 26 January 1999

8th February: The index broke out of a head and shoulders top pointing to 7,750.

Current prediction

Medium term: double head and shoulders top pattern pointing to 8,420 (logarithmic target at 8,570) and a lower target of around 7,750 (log target at 7,989).

Long term: none, but the long term trend is still down

Currency: "A speculator would need at least 10 times the amount of money to move interest rates by a magnitude similar to that of last year." - Edmund Harriss, Guinness Flight, Hong Kong, 26 January 1999

1st February: A new top could be forming that could see the index fall below 8,000.

Current prediction

Medium term: double head and shoulders top pattern pointing to 8,420 (logarithmic target at 8,570) . A fall below 9,300 will set a lower target of around 7,750 (log target at 7,989).

Long term: none, but the long term trend is still down

Currency: "A speculator would need at least 10 times the amount of money to move interest rates by a magnitude similar to that of last year." - Edmund Harriss, Guinness Flight, Hong Kong, 26 January 1999

25th January: The index has broken out of a double head and shoulders pattern (two patterns adjacent). Target is 8,500 in the short term. Volume supports the pattern. Next weekly support at 9,100.

Current prediction

Medium term: double head and shoulders top pattern pointing to 8,500.

Long term: none, but the long term trend is still down

18th January: The index is supported on a medium term support. But it is facing stiff long term resistance. A fall below 9,750 could take the index swiftly to 8,500 and below. But volume is building, giving a last chance at breaking out of the long term barrier.

Current prediction

Medium term: reverse head and shoulders pointing to 12,000, more likely if resistance at 10,800 breaks.

Long term: none, but the long term trend is still down

11th January: A triangle points above the next long term resistance to 11,500. The fund chart appears more bullish, suggesting a 30% upside in the next couple of months. But there are still strong resistances at 10,800, 12,000 and 12,500.

Current prediction

Medium term: reverse head and shoulders pointing to 12,000. Resistance at 10,800 breaks.

Long term: none, but the long term trend is still down



1998

21st December: The index recovered surprisingly last week, cancelling the head and shoulders top pointing to 8,650. Now we have a new head and shoulders pattern pointing lower. But it has yet to break. Volume is low. But that could be seasonal.

Current prediction

Short term: Possible head and shoulders top pointing to 8,400. It has yet to break. But it is sufficiently forbidding to put on hold our reverse head and shoulders pointing to 12,000 until the resistance at 10,750 breaks.

Long term: none, but the long term trend is still down

14th December: The index is making a little head and shoulders top. This pattern bears and uncanny resemblance to the top in March this year. If it breaks we can expect the market to fall to 8,700 without much ado.

Current prediction

Short term: a head and shoulders top pointing to 8,650. We must therefore put on hold our reverse head and shoulders pointing to 12,000 for the remainder of the week and see whether the top pattern will be cancelled.

Long term: none, but the long term trend is still down

7th December: Long term daily and weekly resistances turned the Hang Seng Index south. Volume is falling off. Unless volume picks up, the stage is set for a fall, perhaps to 8,750 in the short term.

Today's little burst of 4% took the market up close to the resistance but not on high volume. It could be making a right shoulder for a small head and shoulders top, or a mere turn on support. We'll have to wait a few more days to see. The crucial resistance is at around 10,600

Current prediction

Short term: reverse head and shoulders pointing to 12,000. Chances are still good. But there is strong resistance and a bearish pattern that could spoil the show.

Long term: none, but the long term trend is still down

18th November: The index is trapped on long term resistance. But there is good cause to hope that the hurdle will be overcome.

Current prediction

Short term: reverse head and shoulders pointing to 12,000. Good chance.

Long term: Head and shoulders top pointing to 4,360 on a logarithmic scale and 915 on an arithmetic scale is cancelled.

4th November: The index has made a good reversal pattern pointing to 12,000. The fund confirms the bullish scenario. But check out the medium term chart and remember the fate of the February rally.

Current prediction

Short term: reverse head and shoulders pointing to 12,000. Good chance.

Long term: Head and shoulders top pointing to 4,360 on a logarithmic scale and 915 on an arithmetic scale is cancelled.

23rd October: Volume is still healthy. But resistance is everywhere.

Current prediction

Short term: reverse head and shoulders pointing to 11,800. Good chance.

Long term: Head and shoulders top pointing to 4,360 on a logarithmic scale and 915 on an arithmetic scale is cancelled.

19th October: Volume build-up last week increased the index's chances of continued rallies. Might be a bit of profit taking, perhaps some more pennants, gaps. But I can see a bit more festivity before the rug gets pulled out.

Current prediction

Short term: reverse head and shoulders pointing to 11,800. Good chance.

Long term: Head and shoulders top pointing to 4,360 on a logarithmic scale and 915 on an arithmetic scale is cancelled.

12th October: The Hang Seng Index broke out of a valid reversal pattern pointing to 10,000, perhaps by late November. But the rally is fragile, due to the poor volume of the right shoulder of the pattern. If the index gets to 10,000 and no higher, the long term targets listed below will still be valid. Thus the rally should not be taken as a sign of long term reversal unless the 10,000 level is broken and a new reversal pattern forms.

In view of the further rally this week, we might even see the market hit resistance at 9,500. I'll look out for gaps and keep the Alertlist members updated.

5th October: Last Wednesday's turnover of HK$2.4 billion is the lowest I have on record. I know we should expect low volume before a holiday. But this is the lowest pre-holiday "low volume" day. That tells us that confidence is very low. It also sets the stage for our head and shoulders top scenario, as I have outlined below.

28th September: The index is making a short term head and shoulders top. The fund appears to have broken out of a reversal pattern. But it is not to be trusted, given the poor volume in the index.

21st September: A little double top could be forming. It is similar to the double top of June this year, except that it is larger and could take the index down below 6,000.

Current prediction

Short term: none, but I am betting that my cancelled triangle pointing to 6,350 will happen.

Long term: Head and shoulders top pointing to 4,360 on a logarithmic scale and 915 on an arithmetic scale. But it is an up-sloping neckline pattern, which has a lesser probability of success than a horizontal or down-sloping neckline pattern. So we should look to medium term patterns for confirmation. None such yet.

14th September: As expected, the perfect double bottom of last week failed. The medium term resistances won the day. Volume dried up as the index fell over the last two days of the week. I have no predictions now. But I would give some credibility to my ol' blue triangle pointing to 6,350, about which I have been harping over the past month or so.

Current prediction

Short term: none, but I am betting that my cancelled triangle pointing to 6,350 will happen.

Long term: Head and shoulders top pointing to 4,360 on a logarithmic scale and 915 on an arithmetic scale. But it is an up-sloping neckline pattern, which has a lesser probability of success than a horizontal or down-sloping neckline pattern. So we should look to medium term patterns for confirmation. None such yet.

7th September:  The index broke out of a valid double bottom. But it is a pattern to be wary of. I would not feel comfortable with it until the index breaks the next strong resistance at 8,250.

Current prediction

Short term: valid double bottom pointing to 9,250. But I'm suspicious of it due to the recent government intervention that inflated the volume pattern.

Long term: Head and shoulders top pointing to 4,360 on a logarithmic scale and 915 on an arithmetic scale.

21st August: I cannot understand folly on such a grand scale. The Thai government exhausted its entire reserves last year attempting to defend the baht. Now the Hongkong government appears to be following the same misguided policy. It will probably end in the same way that the Thai government's foray ended: bankruptcy.

The policy is misguided because it ignores the market trend, which is, I argue, more powerful than any government or other collective body. Speculators follow the trend, they do not create it. The government thinks that it is fighting speculators. But it is attempting to fight against the trend. It is like trying to make a river flow uphill.

Look at the second chart on this page and you will see how the index turned on a medium term support, despite the government's intervention.

Current prediction

Short term: Valid triangle pointing to 6,350. Look out for the HK government intervention reverse head and shoulders.

Long term: Head and shoulders top pointing to 4,360 on a logarithmic scale and 915 on an arithmetic scale.

24th August: Bang on target! The market hit the logarithmic target of 6,530 for our short term triangle and rebounded sharply, just as it did in June, when it hit our log target for the head and shoulders top at 7,400.

But the rebound at 6,530 last week also fulfilled the arithmetic target for our head and shoulders top. We might therefore expect that our arithmetic triangle target of 6,350 would also be reached.

A reverse head and shoulders almost broke out today. It points to 9,150. But I don't trust it. The Hongkong Government's intervention could be distorting the picture. Let's wait a day or two and see. I'll send a Asiachart Alert to those on the list if it breaks out.

Current prediction

Short term: Valid triangle pointing to 6,350. Look out for the HK government intervention reverse head and shoulders.

Long term: Head and shoulders top pointing to 4,360 on a logarithmic scale and 915 on an arithmetic scale.

12th August: The index might pause at 6,400 for a while. But the long term outlook is now bleak. A valid logarithmic target points to 4,630. The arithmetic target is around 1,000.

The good news is that the medium term target for the index has passed and the long term arithmetic target for Amoy Property is approaching.

Current prediction

Short term: Valid triangle pointing to 6,350.

Long term: Head and shoulders top pointing to 4,360 on a logarithmic scale and 1,000 on an arithmetic scale. The target of 1,000 could possibly happen next year.

3rd August: Mixed signals this week. The index chart looks decidedly weak. There is resistance in the medium term chart, a valid triangle pointing to 6,350 in the short term chart and the long term fund chart appears to be channeling down.

The small ray of hope is the good support in the long term Amoy Property Chart, a reliable indicator for the ever sensitive property sector. There is also a possible falling wedge, which is a bullish sign, in the short term chart for Amoy.

There is also good support on the long term weekly index chart at 8,000.

On balance, I see the index falling.

Current prediction

Short term: Valid triangle pointing to 6,350. But a wedge is forming in the Amoy short term chart, suggesting a possible rise.

Long term: none

22nd July: The insipid volume of the Hang Seng index over the last few days suggests that the market is in no mood to rally. There are also some short term resistances that, in the context of low volume, contribute to my bearish inclination.

Current prediction

Short term: Nothing clear. Triangle is forming.The chance of the arithmetic target of 6,900 becomes increasingly probable.

Long term: none, but the fund chart suggests a 20% drop in the market.

14th July: I have no clear predictions this week. There is a wedge that points to 7,400. That is the most likely scenario, especially with the low volume. As for the chance of a rally that I pointed out last week, that has gone with the wind, as expected, due, I suggest, to the low volume. If we get a surprise rally this week or next, look to volume.

Current prediction

Short term: nothing clear. But a rising wedge suggests a return to 7,400. This market is not fond of double bottoms. Thus I would not expect the market to reverse at this level.

Long term: none

6th July: The index broke out of a reverse head and shoulders pattern. But the volume surrounding the breakout is not encouraging. Accordingly, the index might drift up to the medium term resistance at 9,500, or, if volume picks up, we could see 10,000. All depends on good volume of HK$7 billion per day or more.

The fund charts paint a rosy picture. But they should not be trusted in light of the low volume for the Hang Seng.

The downside is still shown in the long term chart for Amoy Property, which suggests that the property sector could still tumble forty or fifty percent.

Current prediction

Short term: A reverse head and shoulders pointing to 10,000. But the pattern has a low probability of success given the low volume on the right side of the head and shoulder. 6,800 is cancelled due to the proximity of the turn to the arithmetic target and the magnitude of the rally. But it still might happen. Low chance.

Long term: none

29th  June: The Hang Seng index is facing a tough resistance this week at 8,900. Low volume over the past few days suggests low probability that the resistance will be overcome. However, there is a measure of encouragement in the fund charts, at least in the medium term.

22nd  June: I don't like surprises. But I have to confess that the turn of the Hang Seng at around 7,400 last week was a shocker. I had predicted a fall to 6,900. The rapid rise over the next couple of days made an island reversal, giving further evidence of a short term rally. The index might yet fulfill the target of 6,900, that I have been predicting for a few weeks. However, the retracement last week is of such a magnitude that I must cancel the prediction.

What went wrong with my system? You will note that I have have a pretty good track record of picking bottoms for Hong Kong using an arithmetic scale on my charts. Well, now it appears that the arithmetic scale has failed (although it is too early to say conclusively - it might yet be proven correct, but it missed the rally). The index turned exactly on the logarithmic target. I have constructed a crude chart below to show the precision with which the index fulfilled this target. It throws a spanner in my works. Accordingly, I have scrambled to review my other targets for this, and indeed, other markets, on the basis of logarithmic scales.

The result is, for Hong Kong, that all long term targets have been reached or passed on a logarithmic scale. This includes the index, Amoy Property, and the fund chart. (There is still a little cloud on the short term chart for Amoy.) Thus there is a chance that the index has bottomed out. This does not mean that the index will reverse. But it alerts us to the possibility such that we should be on the lookout for a reversal.

As to the question of using logarithmic or arithmetic scales,see the note linked here.

Current prediction

Short term: none. 6,800 is cancelled due to the proximity of the turn to the arithmetic target and the magnitude of the rally. But it still might happen. Low chance.

Long term: none

1st June: It's all up for  the Hang Seng Index. I expect the index to fall to 6,900 by the end of July.

Only the long term support at the current level could, by a miracle, save the poor market from decimation.

But that would require the market reversing on a double bottom. And the Hong Kong is not a market to reverse on double bottoms. So I wouldn't get my hopes up.

Current prediction

Short term: Head and shoulders pointing to 6,900. Possible double bottom on the weekly might save the day. Might! Hah!

Long term: none

25th May: We have a valid target of 8,900. But I am keeping an eye open for a possible reversal for the following reasons:

  • the right shoulder for a reverse head and shoulders pattern at 10,000 failed to materialize. This was a big surprise. I was confident that we would get this pattern, thereby giving a clear indication of further falls. This leaves open the possibility that there will not be further falls;
  • The index is making what appears to be a big reverse head and shoulders pattern. This is the usual pattern by which the Hang Seng Index reverses. The symmetry of this pattern resembles that of previous reverse head and shoulders patterns. Volume would have to rise substantially over the next few months to around 20 billion HK$ per day. This seems unlikely at present. In the current sentiment, it would be as though such volume should come from nowhere. But sentiment is a sluggish phenomenon. It gives no indication of a reversal.
  • Chances are that the trend will continue down. 8,900 could give us a lower target. But at present we will have to wait and see.

    Current prediction

    Short term: Head and shoulders pointing to 8,900. Chances of this target being reached will be greatest once the index falls through the support at 9,400.

    Medium term: none. A dubious head and shoulders pattern points to 7,800. But it might not work due to the lack of a developed right shoulder.

    Long term: none

    18th May: The index failed to make a substantial rebound at the 10,000 level. That means that we do not have a clear right shoulder for our head and shoulders top. Accordingly, I cannot predict 7,800 with the same degree of confidence that I was hoping for last week. The best prediction is a pattern pointing to 8,900. But there is also a very good support at the current level. It is thus possible that the index might reverse at the current level.

    On the other hand, the fund still looks bearish and the measurement for our dubious head and shoulders top is exactly the previous bottom of 7,800, suggesting a return to that level.

    With luck, the market will clear up uncertainties this week.

    Current prediction

    Short term: Head and shoulders pointing to 8,900. Chances of this target being reached will be greatest once the index falls through the support at 9,400.

    Medium term: none. A dubious head and shoulders pattern points to 7,800. But it might not work due to the lack of a developed right shoulder.

    Long term: none


    11th May: Down to 7,800 by the third week of July. That's my feeling on the Hang Seng Index. And there's no guarantee that it's a bottom.

    But as of today, the feeling is just a feeling, not a valid prediction. (It is based on the continuing low volume for the index and the bearish pattern for the property stock that I follow.) Our target of 9,900 was met last week. We now need to wait for a small rebound, perhaps to 10,400 or higher. Then a failure below the neckline. Then either a rapid plunge, or an orderly retreat.

    Current prediction

    Short term: head and shoulders pointing to 9,900 or slightly less. That happened last week.

    Medium term: none. But we can expect a second head and shoulders to form with neckline at 10,000 and we can expect this pattern to break and then we can expect the index to fall  to 7,800.

    Long term: none

    4th May: All indications are that the index will fall to 10,000, rebound a little, then fall to 8,000. Activity last week did nothing to change the picture.

    Current prediction

    Short term: head and shoulders pointing to 9,900 or slightly less.

    Medium term: none. But we can expect a second head and shoulders to form with neckline at 10,000 and we can expect this pattern to break and then we can expect the index to fall  to 8,000.

    Long term: none

    27th April: The index broke out of a little head and shoulders top, pointing to just below 10,000. At this level we should expect a rebound, especially if the fall occurs around the week of 4th May (next week). The rebound would create another head and shoulders pattern. This second pattern should break, as the neckline is above the target for our current, valid pattern. Then we can expect a further fall to 8,000.

    The fund chart gives a reasonable confirmation of this scenario. But it also leaves open the possibility of a surprise rally.

    Current prediction

    Short term: head and shoulders pointing to 9,900 or slightly less.

    Medium term: none. But we can expect a second head and shoulders to form with neckline at 10,000 and we can expect this pattern to break and then we can expect the index to fall  to 8,000.

    Long term: none

    20th April: A small head and shoulders pattern broke last Friday. Rising volume accompanied three days of falls, suggesting more falls to come. The target for this pattern is 10,000. But it looks like a set of patterns is about to be set into motion, taking the index back to 8,000.

    Current prediction

    Short term: head and shoulders pointing to 10,000 or slightly less.

    Medium term: none

    11th April: The Hang Seng index is looking weak. Volume just isn't picking up. It makes bullish predictions look extremely shaky. Without a pickup in volume, I expect the index to plunge again.

    Current prediction

    Short term: reverse head and shoulders pointing to 13,800 or slightly less. My hopes for this target are diminishing due to the weak volume since March.

    Medium term: none

    20th March: The index has crossed a few resistances on increasing volume, giving hope that our target of 14,00 will be reached in a month or two.

    Current prediction

    Short term: reverse head and shoulders pointing to 14,000 or slightly less. Lots of resistance on the way.

    Medium term: none

    16th March: The index was sedated last week at the intersection of short and medium term support and resistance lines. With luck this week will see a little more action.

    Current prediction

    Short term: reverse head and shoulders pointing to 14,000 or slightly less. Lots of resistance on the way.

    Medium term: none

    Long term: none, but the property stock Amoy still points to a fall of at least 50% from the current level.

    9th March: The index turned close to resistance at 11,800 last week, pulled back to the neckline of our reverse head and shoulders and turned up again on Friday. The weekly chart looks promising. But the property sector is still weak. Chances are still good for our target of 14,000.

    Current prediction

    Short term: reverse head and shoulders pointing to 14,000 or slightly less. Lots of resistance on the way.

    medium term: none

    Long term: none, but the property stock Amoy still points to a fall of at least 50% from the current level.

    2nd March: A valid reversal pattern points to 14,000. This is confirmed by the fund chart. Even the property sector looks moderately bullish. But there are still strong resistances to overcome at around 12,100. It might be a few weeks before our target is attained.

    23rd February: There's a chance that the bull market will return to Hong Kong if the index can break 11,000 on strong volume. Otherwise, the current resistances look very strong.

    Current prediction

    Short term: small triangle pointing to 11,800 appears to be fizzling out.

    medium term: none

    Long term: none

    16th February: The index looks weak. It is just hovering above the 10,000 level, but no patterns point higher at the moment, except for a small triangle that appears to be fizzling. The 11,000 resistance appears to be operating. A similar channel resistance in the fund looks as though the original target, corresponding to about 7,000 for the index, could be on the cards.

    Current prediction

    Short term: small triangle pointing to 11,800 appears to be fizzling out.

    medium term: none

    Long term: none
    10th February: The surprising rally of the Hang Seng index last week has cancelled the gloom scenario outlined in previous weeks. However, the property sector, as exemplified by Amoy Property, still looks weak. We need to see a few key resistances break before we can be confident of a durable reversal in the Hong Kong market.

    Current prediction

    Short term: small triangle pointing to 11,800. One or two other patterns could also break.

    medium term: none

    Long term: none

    2nd February: After the surprising rally yesterday, Monday 2nd February, we can now put on hold the entire melt down scenario. If the index holds above 10,000 at the end of the week, the whole scenario will be cancelled.

    Otherwise, read on:

    Let us review my "melt-down scenario":

  • a double top. Neckline is at 9,500. The target is 7,000 exactly.
  • This pattern has broke out on 9th January. The prediction is confirmed for the medium term. We have had two pullbacks to the neckline at 9,500. (Theory allows not more than two pullbacks.)
  • One of the pullbacks made a rising wedge. The target for this wedge is the same as the base of the wedge, namely, 8,000.
  • A head and shoulders on the weekly chart with neckline at 10,000. The target is around 3,000.
  • The neckline broke on Friday 9th January, along with the 8 year support. The prediction is still valid. It will remain valid unless the market retraces and closes the week above 10,000.

    ( However, for the sake of being conservative, you might note that on a logarithmic scale, based on percentage change, not mere arithmetic change, the target would be higher at 5,500. But this is, I hope, sufficiently distant in time to allow further refinement.)

    Falling interest rate outlook in the U.S. doesn't appear to be helping the situation.

    Current prediction

    Short term: Wedge taking the index back to 8,000.

    medium term: Double top pointing to 7,000. Pullback to 9,500 possible. The current channel suggests that the target could occur next month or end of March.

    Long term: Head and shoulders on the weekly chart, pointing to 3,000 (5,500 logarithmic). The current channel would allow the target to be reached in November this year.

    26th January: The killer wedge, mentioned last week, is moving according to schedule.

    Let us review my "melt-down scenario":

  • a double top. Neckline is at 9,500. The target is 7,000 exactly.
  • This pattern has broke out on 9th January. The prediction is confirmed for the medium term. We have had two pullbacks to the neckline at 9,500. (Theory allows not more than two pullbacks.)
  • One of the pullbacks made a rising wedge. The target for this wedge is the same as the base of the wedge, namely, 8,000.
  • A head and shoulders on the weekly chart with neckline at 10,000. The target is around 3,000.
  • The neckline broke on Friday 9th January, along with the 8 year support. The prediction is still valid. It will remain valid unless the market retraces and closes the week above 10,000.

    ( However, for the sake of being conservative, you might note that on a logarithmic scale, based on percentage change, not mere arithmetic change, the target would be higher at 5,500. But this is, I hope, sufficiently distant in time to allow further refinement.)

    Falling interest rate outlook in the U.S. doesn't appear to be helping the situation.

    Current prediction

    Short term: Wedge taking the index back to 8,000.

    medium term: Double top pointing to 7,000. Pullback to 9,500 possible. The current channel suggests that the target could occur next month or end of March.

    Long term: Head and shoulders on the weekly chart, pointing to 3,000 (5,500 logarithmic). The current channel would allow the target to be reached in November this year.

    19th January: Today's rally stopped on the neckline of our double top. It is a mere pullback. There is also a rising wedge with falling volume, suggesting that the neckline at 9,500 will not be broken. If 9,500 is passed on good volume this week, there is a chance of 11,000 and the cancellation of the doom scenario.

    Let us review my "melt-down scenario":

  • a double top. Neckline is at 9,500. The target is 7,000 exactly.
  • This pattern has now broken. The prediction is confirmed for the medium term. A pullback might occur to the neckline at 9,500.

    This happened today.

  • A head and shoulders on the weekly chart with neckline at 10,000. The target is around 3,000.
  • The neckline broke on Friday 9th January, along with the 8 year support. The prediction is still valid. It will remain valid unless the market retraces and closes the week above 10,000.

    ( However, for the sake of being conservative, you might note that on a logarithmic scale, based on percentage change, not mere arithmetic change, the target would be higher at 5,500. But this is, I hope, sufficiently distant in time to allow further refinement.)

    Interest rate outlook in the U.S. doesn't appear to help the situation.

    Current prediction

    Short and medium term: Double top pointing to 7,000. Pullback to 9,500 possible. The current channel suggests that the target could occur next month or end of March.

    Long term: Head and shoulders on the weekly chart, pointing to 3,000 (5,500 logarithmic). The current channel would allow the target to be reached in September this year.

    12th January: The 8 year support broke on the weekly chart last week. So too did the neckline of the head and shoulders that points to 3,000 (or 5,500 on a logarithmic scale, see below).

    Let us review my "melt-down scenario" from last month:

  • a rising wedge resembling that of August - September. The target is the previous low at around 8,700. The little head and shoulders confirms this prediction.
  • This target was touched intra-day on Friday 9th January.
  • a double top. Neckline is at 9,500. The target is 7,000 exactly.
  • This pattern has now broken. The prediction is confirmed for the medium term. A pullback might occur to the neckline at 9,500.
  • A head and shoulders on the weekly chart with neckline at 10,000. The target is around 3,000.
  • The neckline broke on Friday, along with the 8 year support. The prediction is valid.( However, for the sake of being conservative, you might note that on a logarithmic scale, based on percentage change, not mere arithmetic change, the target would be higher at 5,500. But this is, I hope, sufficiently distant in time to allow further refinement.)

    Interest rate outlook in the U.S. doesn't appear to help the situation.

    Current prediction

    Short and medium term: Double top pointing to 7,000. Pullback to 9,500 possible. The current channel suggests that the target could occur next month or March.

    Long term: Head and shoulders on the weekly chart, pointing to 3,000 (5,500 logarithmic). The current channel would allow the target to be reached in September this year.

    5th January: Not much occurred last week. Accordingly, my comments of 29th December are still relevant: (ie, I won't write them out again, gulp, swig, burp, I'll have another glass instead).

    Now I'm confused. I don't know what to make of an impending interest rate fall in the US. (See the Dow page) What does it mean for the Hang Seng? The short term picture is still bearish. The situation in Japan hasn't changed. But if interest rates in the US are set to fall, which I believe to be the case, then the outlook for Hong Kong might not be so gloomy, in the long term.

    I preserve my melt-down scenario from previous weeks:

  • a rising wedge resembling that of August - September. The target is the previous low at around 8,700. The little head and shoulders confirms this prediction.
  • a double top created by the recent rally. Neckline is at 9,500. The wedge will probably see a breakout from this pattern. The target is 7,000 exactly.
  • A head and shoulders on the weekly chart with neckline at 10,000. The right shoulder was created by the recent rally. The target is around 3,000.
  • All of this is speculation. It presumes a chain of events. But the chain has been set in motion. The collapse of Japan, the fund chart, and the Amoy Property chart all make the probability of the meltdown entirely possible.

    The long term chart gives hope of support at 10,000. And the previous low of 8,700 should provide some support, if only temporary.

    To this I would add that if interest rates drop in the US, the situation might also be saved in the medium to long term. The picture is somewhat complicated. We will have to wait and see how things pan out.

    Current prediction

    Short and medium term: A fall to 8,700, the previous low, courtesy of a rising wedge. A fall below 9,500 will most likely set off a chain reaction of a fall to 7,000.

    Long term: 3,000 is entirely possible, albeit in a year or so. But falling interest rate scenario makes the picture unclear.



    1998

    29th December: Now I'm confused. I don't know what to make of an impending interest rate fall in the US. (See the Dow page) What does it mean for the Hang Seng. The short term picture is still bearish. The situation in Japan hasn't changed. But if interest rates in the US are set to fall, which I believe to be the case, then the outlook for Hong Kong might not be so gloomy, in the long term.

    I preserve my melt-down scenario from previous weeks:

    All of this is speculation. It presumes a chain of events. But the chain has been set in motion. The collapse of Japan, the fund chart, and the Amoy Property chart all make the probability of the meltdown entirely possible.

    The long term chart gives hope of support at 10,000. And the previous low of 8,700 should provide some support, if only temporary.

    To this I would add that if interest rates drop in the US, the situation might also be saved in the medium to long term. The picture is somewhat complicated. We will have to wait and see how things pan out.

    Current prediction

    Short and medium term: A fall to 8,700, the previous low, courtesy of a rising wedge. A fall below 9,500 will set off a chain reaction of a fall to 7,000.

    Long term: 3,000 is entirely possible, albeit in a year or so. Falling interest rate scenario makes the picture unclear.

    22nd December: A little head and shoulders broke out today, paving the way for a fall to 8,700 and then to 7,000.

    Sadly, we are now faced again with a melt-down to 3,000 that looks like this:

  • a rising wedge resembling that of August - September. The target is the previous low at around 8,700. The little head and shoulders confirms this prediction.
  • a double top created by the recent rally. Neckline is at 9,500. The wedge will probably see a breakout from this pattern. The target is 7,000 exactly.
  • A head and shoulders on the weekly chart with neckline at 10,000. The right shoulder was created by the recent rally. The target is around 3,000.
  • All of this is speculation. It presumes a chain of events. But the chain has been set in motion. The collapse of Japan, the fund chart, and the Amoy Property chart all make the probability of the meltdown entirely possible.

    The long term chart gives hope of support at 10,000. And the previous low of 8,700 should provide some support, if only temporary.

    Current prediction

    Short and medium term: A fall to 8,700, the previous low, courtesy of a rising wedge. A fall below 9,500 will set off a chain reaction of a fall to 7,000.

    Long term: 3,000 is entirely possible, albeit in a year or so.

    13th December: I must confess I was taken by the rally last Monday. It blipped over the 11,600 resistance giving hopes that have not materialized. Sadly, we are now faced again with a melt-down to 3,000 that looks like this:

  • a rising wedge resembling that of August - September. The target is the previous low at around 8,700.
  • a double top created by the recent rally. Neckline is at 9,500. The wedge will probably see a breakout from this pattern. The target is 7,000 exactly.
  • A head and shoulders on the weekly chart with neckline at 10,000. The right shoulder was created by the recent rally. The target is around 3,000.
  • All of this is speculation. It presumes a chain of events. But the chain has been set in motion. The collapse of Japan, the fund chart, and the Amoy Property chart all make the probability of the meltdown entirely possible.

    The long term chart gives hope of support at 10,000. This could occur if the index falls to 7,000 and recovers within a week. But I don't give it much chance.

    Current prediction

    Short and medium term: A fall to 8,700, the previous low, courtesy of a rising wedge. A fall below 9,500 will set off a chain reaction of a fall to 7,000.

    Long term: 3,000 is entirely possible, albeit in a year or so.

    8th December: The Hang Seng broke out of a major resistance at 11,600 on strong volume. This gives hope for a rally to 13,000.

    Current prediction

    Short and medium term: possible rally to 13,000. Only the neckline from a previous head and shoulders is stopping the index.

    Long term: still a danger of a fall to 7,000.

    Letters on the peg

    1st December: The market might rebound to 11,000, or even 11,600. But not much higher. The index is making a "rising wedge within a falling wedge" pattern. Check it out below. Not a pretty picture. It suggests that another double top might occur or something equally nasty.

    Current prediction

    Short term: possible rebound to 11,600, courtesy of a falling wedge, but 11,000 is the more likely cap.

    Long term: danger of a fall to 7,000.

    17th November: The property sector, as represented, by Amoy Property, is the most persuasive factor in the current Hong Kong equation. It points down by at least 30%. A rebound to the level of 11,600 would not erase this prediction.

    Current prediction

    Short term: possible rebound to 11,600, courtesy of a falling wedge.

    Long term: danger of more falls as property sector could fall by 30%. Long term support is at 9,500. This might intervene.

    29th October: The pullback today erased the pennant prediction. 7,000 is cancelled. But the Amoy prediction stands. That means a thirty percent or more fall is still on the cards.

    Current prediction

    Short term: rebound happened. No short term target

    Medium term: Head and shoulders with target of 9,000 fulfilled in a rather short "medium term" of two days.

    Long term: none at the moment. Beware of a fall to 3,500, as suggested below.

    28th October:

    Strong evidence for short lived reversal this week

    Stare a moment at the mess in the chart below. There are a number of interesting goodies to ogle.

    First, note the green head and shoulders (green arrows and green down-sloping neckline). The day-low on Black (or bloody or blue, or black and blue) Thursday touched exactly the prediction for the green pattern. (I marveled at about 3.00 pm HK time as I watched the price sink to the point in question and miraculously reverse.)

    Secondly, note that there is a gap made by prices of Thursday and Friday. The question is: is this an exhaustion or a continuation gap? If it is an exhaustion gap, we might expect prices to recover next week. The continuation gap, on the other hand, points down, possibly to as low as 6,500. Which is it?

    I favour the former "exhaustion gap", wherein the trend exhausts itself with "one final leaping spurt", to use the lovely Freudian allusion of Robert D. Edwards. Evidence in favour is the fact that prices did not sink lower on Friday, the day after the gap. On the contrary, the closing price "registered back near the edge of the gap" (Edwards 5th Edition page 204) making the reversal "a virtual certainty", according to Guru Edwards.

    Wow! A virtual certainty. Such creatures are rare in the annals of technical analysis. Pawn thy grandmother! Ready thy sheckles. The Hang Seng is sure to recover this week, notwithstanding the Dow's fall. (Edwards is getting a little too excited methinks. There are no certainties in this business.)

    Further evidence for an exhaustion gap (if we need it) is the fact that the day low of last Thursday coincides exactly with the target of the green head and shoulders at around 9,700. According to Magee, such a coincidence of intra-day gap extremity with a target from a price pattern is a sign of exhaustion.

    Finally, exhaustion gaps are closed within a few days. Let's see. But before we pawn our grandmothers and ready our cash, let's get sober. Read on.

    Thirdly: Note that the reversal that we speak of in the paragraphs above is not a durable reversal. It is quite likely to fizzle out. See the pink rising wedge at the 13,000 to 15,000 level in August/September. A repeat of this wedge phenomenon is likely. Note the pink circle. The August wedge made a base with a gap-preceded spike which is similar to the spike formed last Thursday and Friday. We could therefore expect, in the event of further rises, a rising wedge pattern taking the index not much higher than 12,500 before another nasty fall.

    Fourthly: And where would such a fall take the index? Note the blue neckline and arrows, outlining another head and shoulders top. This head and shoulders points down to 8,700 (approximately). This would be the target to be expected if we get a drop from the wedge (although the wedge itself only requires a drop to the previous low at 9,700). Then watch out!

    Fifthly: Now we are getting into the realms of speculation. But if the wedge occurs with a peak of 12,500, or thereabouts, and then we have a fall from the wedge such that the blue head and shoulders target is fulfilled, a right shoulder will have been formed for a giant head and shoulders (shown in red).

    This pattern would have two possible necklines: one in red and one in black (sloping).

    Attainment of the blue head and shoulders target would have the "cascading effect" of crossing the red and black necklines, giving targets of 4,500 and 3,500 respectively.

    It could happen.

    27th October: Bye Bye Hang Seng Bull Market.....

    The question now is how far down.

    Our target of 11,600 broke without even putting up a day's support. Just shows what the Hongkong stock market is made of: mostly speculation. Who would have dared to think that the index would fall so far so quickly? Not me.

    Let us review what has happened and speculate as to what will happen:

    What happened these last few days: The index has broken through a head and shoulders top pattern. There are two possible necklines: green and blue. Green has a target of 9,700. This target was met today, intra-day. The blue target of 9,000 takes the neckline to include intra-day prices. It has not yet been met.

    What might happen? After such a sell-off, we might expect a rebound. This might create another right shoulder to the large pattern shown in black. If this occurs, 3,500 is entirely feasible. It would take years for the market to recover. 9,000 would be closer to the historical low valuation level. If this happens soon, so much the better: a new bull market can start immediately.

    This chart shows the close at 23rd October: Black Thursday to the sensationalists.

    13th October: The support at 14,000 is crucial. The index fell to this level today. There are indications that the index will fall further, but there are also good supports. The fund chart broke a clear head and shoulders top last week, possibly indicating the end of the bull market. Unless there is a strong rebound this week, which might happen, the index appears to be going down.

    Read the scenarios below:

    Scenarios: There are still three scenarios:

    1. The index will make a head and shoulders top at the current level, indicating the end of the current bull market. Volume will continue to fall off. The medium term chart shows this scenario with neckline at the current level, ignoring the two day blip.

    The chart of Amoy Property , a blue chip property counter, shows the danger of a fall in the whole market.

    2. The current correction is a mere pullback to the neckline of a long term reverse head and shoulders which would take the index to a new high. This is shown in the weekly chart. According to this scenario, volume would increase and the target of 17,900 might be attained. Volume has not been increasing in recent weeks, making this scenario less probable.

    3. Double top danger at 16,500 - 17,000. Remember that this is what happened in January and February of 1994, the end of the previous bull market. But this assumes a strong rebound, which is less likely.

    Current prediction

    No prediction yet, but I favour scenario number one, above.

    6th October: Volume is falling off miserably. The prospects for further rises are slim, notwithstanding the euphoria with the Dow. The wedge has met its target of around 15,000. The index is now faced with major resistance.

    Scenarios: There are still three scenarios:

    1. The index will make a head and shoulders top at the current level, indicating the end of the current bull market. Volume will continue to fall off. The index might reach 15,500, but no higher. A fall below 13,000 will confirm the move.

    The chart of Amoy Property below, a blue chip property counter, shows the danger of a fall in the whole market.

    2. The current correction is a mere pullback to the neckline of a long term reverse head and shoulders which would take the index to a new high. This is shown in the weekly chart. According to this scenario, volume would increase and the target of 17,900 might be attained. Volume has not been increasing in recent weeks, making this scenario less probable.

    3. Double top danger at 16,500 - 17,000. Remember that this is what happened in January and February of 1994, the end of the previous bull market.

    26th September: A nicely formed falling wedge broke last week, heralding rises to at least 15,000 and possibly 16,000.

    Is the bull market over?

    This is the big question. The charts show the makings of a nasty head and shoulders top which could spell the end of the bull market. Let us consider the possibilities:

    Scenarios: There are still three scenarios:

    1. The index will make a head and shoulders top at the current level, indicating the end of the current bull market. Volume will continue to fall off. The index might reach 15,500, but no higher. A fall below 13,000 will confirm the move. The current wedge does not rule out this scenario.

    The chart of Amoy Property below, a blue chip property counter, shows the danger of a fall in the whole market. Amoy has just pulled back to its triangle resistance this week.

    2. The current correction is a mere pullback to the neckline of a long term reverse head and shoulders. This is shown in the weekly chart. According to this scenario, volume would increase and the target of 17,900 might be attained. However, on the way, we would be increasingly anxious about the third possibility:

    3. Double top danger at 16,500 - 17,000. Remember that this is what happened in January and February of 1994, the end of the previous bull market.

    Current prediction

    Short term up. Resistances at 15,000, 15,900 and 16,800. No safe entry point at the moment.

    22nd September: A dramatic fall off in volume over the past few weeks bodes not well for the index. But it's anyone's guess where it will go. If the Dow marches up to 8,600 we could see volume return to the Hang Seng Index. Or we could see the index fall through a nasty head and shoulders.

    The long term chart still shows a mere pullback to the neckline of a large reverse head and shoulders pattern.

    Scenarios: There are still three scenarios:

    1. The index will make a head and shoulders top at the current level, indicating the end of the current bull market. Volume will continue to fall off. The index might reach 15,500, but no higher. A fall below 13,000 will confirm the move.

    The chart of Amoy Property below, a blue chip property counter, shows the danger of a fall in the whole market.

    2. The current correction is a mere pullback to the neckline of a long term reverse head and shoulders. This is shown in the weekly chart. According to this scenario, volume would increase and the target of 17,900 might be attained. However, on the way, we would be increasingly anxious about the third possibility:

    3. Double top danger at 16,500 - 17,000. Remember that this is what happened in January and February of 1994.

    15th September: No clear direction at the moment. Volume is still weak. Observations of last week spell out the scenarios:

    There are accordingly three scenarios:

    1. The index will make a head and shoulders top at the current level, indicating the end of the current bull market. Volume will continue to fall off. The index might reach 15,500, but no higher. A fall below 13,000 will confirm the move.

    The chart of Amoy Property below, a blue chip property counter, shows the danger of a fall in the whole market.

    2. The current correction is a mere pullback to the neckline of a long term reverse head and shoulders. This is shown in the weekly chart. According to this scenario, volume would increase and the target of 17,900 might be attained. However, on the way, we would be increasingly anxious about the third possibility:

    3. Double top danger at 16,500 - 17,000. Remember that this is what happened in January and February of 1994.

    8th September: The index is in danger of making a head and shoulders top, with a target of 9,000. Despite a good recovery from the panic selling of the past few weeks, daily trading value has diminished to around HK$20 billion. This value is much less than the average of HK$30 billion of the previous weeks. It demonstrates weakness in the recovery from the low of 12,900. There are accordingly three scenarios:

    1. The index will make a head and shoulders top at the current level, indicating the end of the current bull market. Volume will continue to fall off. The index might reach 15,500, but no higher. A fall below 13,000 will confirm the move.

    The chart of Amoy Property below, a blue chip property counter, shows the danger of a fall in the whole market.

    2. The current correction is a mere pullback to the neckline of a long term reverse head and shoulders. This is shown in the weekly chart. According to this scenario, volume would increase and the target of 17,900 might be attained. However, on the way, we would be increasingly anxious about the third possibility:

    3. Double top danger at 16,500 - 17,000. Remember that this is what happened in January and February of 1994.

    Current prediction

    More time needed. No prediction yet.

    1st September: That was quick. Oh well, better put the poor index out of its misery rather than dripping its way to the target. Last week the index approached within a small margin of the target of 14,000. Record volume accompanied the sell-off on Friday. Recall that I referred to a selling climax last week, quoting chapter and verse from Magee.

    It is possible that the sell off last Friday will perform the opposite function. That is, a minor reversal. The index is at good support at the current level. And the long term chart shows the current correction as a mere pullback to the neckline of the reverse head and shoulders stretching from 1994 to the present.

    The danger is that a new head and shoulders top could be forming, or that the gaps will take the index down to around 13,600. In other words, to the (blue broken line) support in the medium term chart.

    Note that the fund chart is still in its support in the long term picture, but the short is in danger of a double top and shows a rising wedge that looks set to push the price down.

    Current prediction

    Short to medium term: A week of suspense. Further falls possible, 13,900 at least, 13,600 if that support fails.

    But the week must close no lower than last week's close, if there is any hope of our target of 17,900, which is now in grave doubt.

    25th August: An amazing 41 billion HK dollars was traded last Thursday morning. All through the day, everyone thought that was great. The index was up more than 200 points for most of the day. But in the last few minutes of trade, surprise surprise, the index dropped suddenly to close down 200 points. I quote from the great guru, John Magee, on the subject of the Selling Climax reversal:

    It is to begin with, a day of unusually high volume, exceeding as a rule, by a notable margin, any trading turnover registered in any one market session for several months past. It comes after a fairly long steady advance.... Prices push up from the opening gong as if nothing could stop them. Suddenly the trend reverses and prices move just as rapidly in the opposite direction.
    This is what happened last Thursday in Hongkong. The volume of 41 billion exceeded previous volumes by thirty percent. It was a record. The index had been advancing steadily for months. The reversal was sudden.

    According to Magee, the Selling Climax does not carry major trend implications. But gives an important clue as to probable trend implications. In the case of Hongkong now, the index ended the week, just as the Dow did, on the neckline of a head and shoulders top. But unlike the Dow, the Hang Seng index has broken long term and short term supports. Thus a fall on Monday will break through the neckline and take the index down to 14,000.

    Current prediction

    Short to medium term: our reverse head and shoulders, with target of 17,900 is on hold. It will only be reinstated if the index closes above 16,000. If the index falls during the early part of the week, we will have a head and shoulders top, albeit with wrong volume patterns, that could take the index to 14,000. ( Note that the index fell on a similar patterned head and shoulders top in January.)

    18th August: I wouldn't be surprised if the index falls to 15,700 on Monday morning, before most of you, my dear readers, visit this site. The big question is whether the index will turn at this point. If it does, we will have a mere pullback to the neckline of our reverse head and shoulders; in other words, a healthy correction. In such a case the target of 17,900 would remain in tact. If, on the other hand, the index falls through the supports, shown in the charts by heavy broken lines, the index could follow the Dow down and our rosy target would be cancelled.

    No cause for panic yet. The only cause for concern is if the Dow goes down to 7,000, in which case the Hang Seng may get dragged down. But there is nothing yet in this market to inspire concern.

    Current prediction

    Short to medium term: a reverse head and shoulders with target at 17,900. The pattern has good volume characteristics: volume on the right shoulder is clearly higher than that of the head. A pullback to 15,700 would not cancel the prediction.

    4th August: The Hang Seng Index broke out of the 8 year resistance last week. The long term chart demonstrates this spectacular breakout.

    This breakout and record volumes tends to confirm our prediction of 17,900. But the index closed last week on a double resistance (short term - blue channel - with medium term - green channel). A correction to 16,000 or even 15,500 might occur this week. The fund reflects the current resistances, whereas the medium and long term charts show how the index has recently broken out of all long term resistance.

    Short to medium term: a reverse head and shoulders with target at 17,900. The pattern has good volume characteristics: volume on the right shoulder is clearly higher than that of the head. A pullback to 15,500 would not cancel the prediction.28th July: The index made a little gain last week and a little pullback. Volume is decreasing: not a positive sign. But the index is keeping within its ascending channel. Nothing remarkable.

    Short to medium term: a reverse head and shoulders with target at 17,900. The pattern has good volume characteristics: volume on the right shoulder is clearly higher than that of the head.

    20th July: "Dynamite" and "question mark" removed. The breakout looks clear. 17,900 here we come.

    14th July: The index broke out of our reverse head and shoulders today, but not decisively. Volume is increasing, but it is nothing compared to the turnover seen in previous weeks. Nonetheless the breakout is clear, albeit not sufficient to feel safe.

    Short to medium term: a reverse head and shoulders with target at 17,900. The pattern has good volume characteristics: volume on the right shoulder is clearly higher than that of the head. Some doubt about the extent of the breakout (it is still close to the neckline) and volume (it is not markedly higher than previous session) as at 14th July. However, we should find evidence either for confirmation or cancellation of the prediction this week.

    8th July: Still no clear picture. The short term chart shows that the up-side scenario is still possible: we could simply be making another right shoulder of our reverse head and shoulders.

    On the other hand, the medium term picture shows the downside possibility: namely, a head and shoulders top, with implications of 12,400 (green pattern). The weekly chart has fallen back into the channel from which it broke out two weeks ago. (You might recall I did not attribute much significance to that breakout.)

    The index is still in an ascending channel, as is the fund. Accordingly, no predictions yet.

    Current prediction: No short term target. We are still waiting for the long term target to be reached and for a new pattern to break on the short term chart, below.

    Long term: Reverse head and shoulders pointing to a target of 15,500.

    29th June: An indecisive week saw the index end in a major resistance channel. No decisive move happened last week.

    The short term picture shows the bullish scenario. A reverse head and shoulders with target of 17,600 is marked in pink.

    The medium term chart shows the bearish scenario. A head and shoulders marked in green will take the index back to 12,400. No one is expecting it. But that's just the time when such calamities happen.

    The long term picture is still positive. The reverse head and shoulders there has broken out of its resistance and points up.

    The fund chart has broken out of an 18 month resistance. But has stopped on a short term resistance.

    Current prediction: No short term target. We are still waiting for the long term target to be reached and for a new pattern to break on the short term chart, below.

    Long term: Reverse head and shoulders pointing to a target of 15,500.

    23rd June: I have to admit, the rise last week was a little quicker than I had expected. But now the real fun begins, as we await the verdict this week for the direction of the Hang Seng index over the next few months.

    On Friday, the Hang Seng index touched the same rising resistance point that sent it crashing a couple of weeks ago. If it turns down again this week, we will have the makings of a head (but read the next paragraph as a footnote). We could then expect a return to the neckline at 13,800, another little shoulder and then, eventually, a fall back to 12,400. The sharpness of the rise last week does suggest this scenario, as heads usually have sharp "v" shaped valleys between shoulders. But this is by no means conclusive.

    Less dramatically, a failure this week could be a mere continuation of the right shoulder of the reverse head and shoulders. Nothing conclusive can be drawn from a return below the neckline. But it is cause for caution.

    On the other hand, if the index breaks through the magic resistance point, we will have a beautiful reverse head and shoulders pattern that will take the index up to around 17,600.

    I could speculate as to what will happen. But this would be pure vanity. We might as well wait and see. It's only a few days. OK, what the hell. Here's to vanity:

    I think that the index will break out of the resistance. The weekly chart has already done so, although not decisively (see below). Also, I would be surprised if the index reversed at its current level. We are expecting 15,300 at least, as a weekly close. The index hasn't reached that level. (Now, there's no saying that it will close at 15,300. It may touch the target intra-day, in which case it won't register as a closing price). But if the index closes at 15,300 it will have penetrated the crucial resistance and the reverse head and shoulders will be confirmed. The target will then be 17,600.

    But again, caution is advised. Regained profits could easily slip away while the index shows its colours.

    Current prediction: No short term target. We are still waiting for the long term target to be reached and for a new pattern to break on the short term chart, below.

    Long term: Reverse head and shoulders pointing to a target of 15,500.

    16th June: Well, wasn't that a lot of fun last week. Yes, I too saw my hard-earned fifteen percent profits eroded to three percent within just a few days. So what's going on? Is it the end of the bull market in Hongkong? Or was last week just a bit of overly enthusiastic profit taking?

    I favour the latter. It is unlikely that the first attempt to breach 15,000 will be the last attempt. I cannot see the market reversing without making either a double top or a head and shoulders top. Last week, the index made, at most, the left shoulder of a head and shoulders top or the first top of a double top.

    On the other hand, the reversal last week paves the way for a jolly nice right shoulder for a reverse head and shoulders pattern that could take the index up to 17,600 or higher.

    9th June: As expected, the Hang Seng turned on the two year resistance point. No real idea what will happen this week.

    Last week the index closed right on the support of its ascending channel. The index could get to 15,500, this week, while still remaining in the current ascending channel.

    2nd June: At morning close today, the Hang Seng passed our resistance at 14,900. It has yet to make a shoulder at the 14,900 point, and so we cannot point our target at the 17,600 level. 16,200 is our highest target, and that is a short term target. But resistance in the weekly chart suggests a close not higher than 14,800 this week. The pennant in the fund chart may provide a clue to the contrary. It points to more sharp rises this week.

    26th May: Several reverse head and shoulder patterns all point up, giving us ever higher targets.

    20th May: OK, let's not get too excited! This is just a possibility. Actually, it's a real probability. All the index needs to do is to make a nice little shoulder where it is currently consolidating. A fall back to 13,700 would be preferable. All this unmitigated rising is not healthy. But if we break through the 14,200 with more strong volume, a new head and shoulders will have a target of 16,700. And since we are predicting 15,500, the index should pass the 14,300 point. More shoulder first!

    12th May: The Hang Seng rocketed past our short term target of 13,650 last week, closing at 13,930, a new record close. Today, at the time of writing, the index is up past the 14,000 point. Volume is also reaching record levels. I had hoped for a bit of consolidation at 13,650. This would have given us a right shoulder of a reverse head and shoulders and a new short term target. However, the index just shot up beyond the resistance point. Not even a pennant or a flag occurred. Accordingly, we have only the medium term resistance at 14,600 to offer as a turning point and the weekly chart resistance at 14,400.

    5th May: Sure enough, the Hang Seng roared back above the 13,000 point level, after breaking through our reverse head and shoulders, clearly outlined in pink on the chart below. Note the great volume on the right shoulder and the gap at breakout. These virtually assure our minimum target of 13,650 (a rare expression of certainty in the annals of technical analysis!)

    28th April: The index continued to rise in a tiny channel, having turned on the long term trendline. The long term chart shows a very nice turn, albeit below the neckline of our long term reverse head and shoulders. So (Martin), I hope you didn't sell out of Hongkong in panic over the last two weeks while I was off in wherever.

    28th March: A bit of a pullback last week and down she goes. Oh well, that's what we expected. The real question is, will the two year support be effective in stopping the descent, or will the head and shoulders (albeit invalid due to volume) take it down to 11,800. Stay tuned...

    24th March: Won't this be a testing week! The Hang Seng fell to around our expected level of 12,400 - 12,500. This changes our current prediction. Read on ...

    17th March: The Hang Seng Index plummeted through its long term support last Thursday and Friday. If the volume during the past two or three weeks had been lower, we would have announced a nasty head and shoulders top that would have taken the index to 11,800. But the volume patterns cast a doubt on that prediction. And the current weakness is more likely to end at around 12,400 or higher. A fall to this level would make a nice pullback on the three year chart and the perfect point of entry for those who follow my prediction of 15,300.

    10th March: More meandering last week. Nothing exciting to report.

    3rd March: Our head and shoulders failed to materialize (probably due to slightly higher volume on the right shoulder - note that the moving average line is higher on the second dip). Nothing clear at the moment. Long term target at 15,100 is still valid.

    14th February: The index fell to 13,239 yesterday. This fall took the index out of our rising channel which had been supporting the index since October 1996. It also increased the right shoulder of a nasty little head and shoulders. (Note that volume is falling from right shoulder through head to the left shoulder, as theory requires.)

    If the index falls lower, the head and shoulders reversal that will take the index to at least 12,400. This fall would not necessarily invalidate our long term prediction. It could merely be a pullback to the neckline of our long term reverse head and shoulders. A turn at this point would be a good opportunity to enter the market, provided no further bearish patterns emerge.

    10th February: Nothing much new to report. We have abandoned our near term target of 14,300. However, the long term of 15,100 is still tact. How and when that will occur we know not. Perhaps this week will give some indication.

    Anant predicts that it is "very unlikely" that the market will breach the resistance at 14,090. He sees a return to as low as 13,300.

    3rd February: The index found good support in the channel that has supported it since October last year. The big "picture" below shows our target of around 15,000.

    27th January: The Hang Seng closed the week at 13,379, below the neckline of 13,600. Our target of 14,300, or thereabouts, is therefore suspended. If the one day reversal of the Dow is a guide for the prospects of Hong Kong, we would be unlikely to get a reconfirmation of the validity of our target soon.

    20th January: The Hang Seng index broke out of the neckline at 13,600 last week (as we predicted). The index has therefore broken out of a reverse head and shoulders. Volume on the breakout was a record high. The minimum measurement for the index is 14,300.

    Anant thinks that the breakout is not decisive enough to "erase the negative factors". I disagree. The breakout was a classic breakout with strong volume. Our medium term objective of 15,000 is in tact..

    13th January: The Hang Seng should follow the Dow up this week, breaking the resistance at 13,600, then progressing towards our target of 15,000.

    On the other hand: Anant Tantuvanich thinks that the Hang Seng will fall to 12,670, possibly this week. He then predicts the index will fall to 12,100. If the index falls below 13,000 again, I would agree with him. Otherwise not.

    4th January: We have three possibilities here. First, we have a symmetrical triangle (thin pink lines). Second, an ascending triangle (thick pink horizontal line and ascending thin pink line). Third, we have a looming double top. As usual, the outcome of this crucial period will follow the progress of the Dow.

    Note, however, the Hong Kong fund, the chart of which appears above, has broken out nicely from an ascending triangle. If this is a harbinger of the index's fortunes, we may expect the Hang Seng to breakout soon.

    At any event, this is not the time to be buying Hong Kong index stocks. Far better to await the outcome of the current tussle. If the index breaks 13,600 on good volume, a trade to 15,000 would be a fair bet.



    1996

    30th December: Similar pattern to the Dow. Similar comments apply. Could be a double top. Could be a reverse head and shoulders. We'll have to wait and see.

    23rd December: In line with the Dow, the Hang Seng Index recovered last week. The index is now above the 30 day moving average. We therefore suspend our pullback target of 12,200 in favour of our prediction of 15,000. However, the important resistance point is at 13,600. If the index turns at this point we could be in danger of a double top.

    16th December: The Hang Seng Index fell through both the 30 day (red line) and the fifty day (green line) moving averages. Both the 14 day (grey) and the 30 day averages have crossed the 50 day average. The 14 day volume average has also fallen under the 30 day volume average. Finally, there is a little head and shoulders, shown in the chart by the rising black line. The black arrow shows the minimum objective of this pattern; namely, back to the long term neckline (broken blue line) at about 12,200.

    If the market pulls back to the 12,200 region and turns, this would be quite healthy and a good buying opportunity. According to head and shoulders theory, two pullbacks to the neckline of a head and shoulders is quite normal. We can see the first pull back in October. A second pullback now looks likely. My guess is the week between Christmas and New Year will make a good low. (Historically, the Hang Seng bottoms during this period in low volumes.)

    If the market turns at blue neckline, our target of 15,000 is still valid.

    10th December: The long term chart, below, suggests that the index will reach 15,000, a rise of approximately 20%.

    25th November: Following the Dow's good fortunes, the Hang Seng is marching up to who knows where? Our Hong Kong fund chart shows a target of $96, a good 15% higher than its current value. This should give some idea of the direction of the index.

    16th November: As expected, the Hang Seng Index hit the 13,000 point resistance and turned. Let's wait and see whether it breaks the pink line this week. As with the Dow, we have no more predictions this week for Hong Kong.

    8th November: The Hang Seng Index is moving up towards stiff resistance at 13,000. Guru Anant (Bangkok Post, November 11) agrees. The pink line is a long term resistance that clearly marks 13,000. Note that volume is increasing, suggesting that no reversal is due yet.

    The Peg and letters thereon

    My feeling is that the peg will either go or be expanded to allow the HK dollar to depreciate. I don't trust the rhetoric that says that the peg is worth defending at all costs. The benefits of a defence are not worth the cost of billions of dollars. In the end, the market will win. If the HK$ is over valued, it will fall. True, Hong Kong has plenty of reserves and so has China, but I can't see them being squandered to preserve the currency, if it is over-valued, like those in the rest of Asia.

    If the peg goes, I doubt that the HK$ will take the beating that other currencies in the region have suffered. Speculators have merely knocked these other currencies off their peg. It is then local traders who, in their panic to secure future obligations, have moved their respective currencies to the depths that these currencies have seen. Hong Kong does not share such debt and should therefore not be so vulnerable from within.

    If any of you, my dear readers, have any comment on the true value of the HK dollar, I would be happy to hear from you at the following e-mail address: gregory@asiachart.com.

    Good coverage of the issue is in the South China Morning Post ( SCMP Internet Edition ) .


    A new letter on the peg

    from Simon Ellis:

    It is rather obvious that the peg cannot last indefinitely at the same rate approx. 7.78 for ever. No currency has been pegged to another currency and lasted indefinitely.

    Hong Kong historically has been an industrial city manufacturing toys and electronics and selling to mainly the US market, hence the logical reason for the currency to be pegged to the USD.

    Hong Kong over the period since the peg was implemented (I was in HK at that time very scary!!!) has had a historical inflation rate of approx. 7-9% p.a. The US over the same time has had an inflation rate of approximately half that of HK. In real terms the HK dollar has appreciate over 40% against the USD.

    There are two main reasons why the peg cannot last:

    1) With inflation in HK continuing to outstrip that of the US (with the peg in place) asset prices have increased to a point that compared to the rest of the world HK is extremely expensive. The salaries paid to the local workforce has increased in line with inflation and productivity gain and the net result the HK labour force is now one of the most expensive in the world. Because of the peg the HK asset prices have not been left to find their own equilibrium level.

    2) HK now is part of China and will continue to increase its dependence on the giant next door. If the PRC economy grows at lets say 9% p.a for five to ten years HK will rapidly become more dependent on what is happening in China rather than the US. How then would it be possible to have your currency pegged against one currency when your economy is dependent on different economy.

    It is a red herring to say that it costs Billions in reserves to defend the currency, this is of course not correct. If the financial secretary successfully defends the currency then those who have shorted the HKD are burnt at the expense of those who are long. Needless to say the financial secretary does not short the dollar as a defence mechanism. The looser is the economy as the financial secretary is forced to increase interest rates to burn the shorts.

    So the thinking man would have to agree that the HKD cannot be pegged against the USD for ever. If this is the case the question should be when is the peg modified or scrapped. If it is scrapped will the HKD be left to be a currency or will it be merged into the RMB.

    My personal opinion is that the peg will last until the period of transition where the PRC economy becomes a more important factor than the US economy to the HK economy. At this stage the argument would be to peg the HKD against the RMB. The natural extension to this is if the HKD is pegged to the RMB and HK belongs to China why have the HKD. Thus the HKD will be replaced by the RMB.


    These letters on the peg have been on the site for a few weeks: (My comments are interspersed in red.)

    KW Leow from Malaysia on the peg issue.

    Hi,

    I totally disagreed with your point of view that the HK Dollar is not worth defending. In fact on the country. HK is the last straw of the Asian economy. Should the currency is de-peg at this critical moment, it will send a very devastating effect to all the Asia bourses and the world major bourses. The only one who will gain from such action will be the rough currency speculators and the whole world will be losers.

    The point is: if the currency is over-valued, then it cannot be defended indefinitely. It can only be defended in the short term. This would be wasteful of reserves. Thailand is an example. All the foreign currency reserves were spent trying to save a hopeless case. In the end, the government gave up. Other Asian countries have seen this. They did not waste their reserves on a hopeless case.

    The question remains: is the HK dollar over-valued.

    HK has a very strong economy and a very stable one and in fact stronger than most industrial nations. I strongly believe that HK dollar is not over-value but on the contrary US dollar is extremely over value. The HK dollar has survive multiple speculative attacks for the past 14 years and HK my all reason should not give up defending the HK dollar now or middle term. Just look in the fact, US has high unemployment rate, and their economy is just out of slowdown and export is barely making impact. The US economy is running a huge deficit even though Congress and the White House is trying to maintain a balance budget. In US most of the city is also running a huge deficit.

    And Hongkong has no debt. Good point.

    I my own opinion, should the US do not de-value their currency in respect of the Asian and European currency, their export will hurt. Yes, but their inflation will be low because imports are cheaper. Which is more important?

    I might be wrong, but I still wish HK dollar will not de-peg.

    Wishing don't make it true.

    Thank You.

    Here's another one from L Cheng:

    Hi, Gregory:

    On Oct. 23 night, I wrote you, saying that I suspected this round free-fall in HongSeng might have run out its steam. I probably was right as HongSeng did rebound the very second day. In that mail, I also expressed my opion about HK dollar's peg to the greenback. I do not think the peg is the real culprit. The real problem is this bull market has finished it course. (When Dow failed to make a new high last week, we should know the bull is in serious trouble. That was the first sign that a global sell-off is unavoidable.)

    We cannot say that either the Dow or the Hang Seng have finished their bull market courses until the long term supports in the weekly chart are broken. They are not as at the time of these crashes.

    Coupled with this final stage bull marktet problem is that so much stupid money is in HK market. Ironically, every bull market ended when too much stupid money flew into the market.

    True.

    It always works in this way. When a market is handled its control from smart money to stupid money, you can almost be certain that a big drop is just around the corner.

    But you only know after the event. Unless you mean "extremely high volume". We had this in Hongkong in August. 40 billion even registered in one day. I thought this was a bit hot to handle.

    Take a look at HK's market participants, you will find that since last April, the smart money had been silently moving away from HK market, if it was not positioned at short side. Replaced was the money from so called "Ma-Ma-Dan" (Mother's party, a term refers to those retailer investors who are housewives, less educated, less experienced, but more eager to make money in HK's last stage of bull market. I found this word our local news paper.) In last June, about 75% trades in HK market came from retailer investors.

    How do we access this sort of information?

    Today, we see the Dow down 555 points, and Toronto down 444. I feel it will get worse before we can see Dow stablized. Neither the US dollar nor the Canadian dollar is pegged to anything, not even gold. But, both the markets are badly battered. It appears what happened to HK market is really not the problem of pegging, but the natural course of a bull market.

    Indeed, the peg question is merely the occasion for the fall, not the cause.

    The reason that HK's situation caught our eyes is that the HongSeng has gone too far during the past few years, thus, it got a big blow-out. The stock market around the world has been overvalued. It has to be depreciated. It doesn't matter what killed the bull or who killed it.

    No, I suppose there's no point crying over dead bulls.

    As of my opion, I do think the peg is not a good ideal. If HK dollar has to be pegged, maybe Chinese RMB is a rational option. Don't laugh. Think about the trend of Chinese economy, and who is HK's largest trading partener. Whether political considerations will allow HK to do so is another question.

    LC.

    And from George Ho in Singapore:

    On the question of the HK$ Peg, I don't [think] anyone will argue, say a century down the road, HK$ will be linked to RMB and not the US$; if it had not been absorbed into the RMB by then. So the only issue on de-Peg is when? Doing it today will be distrasous. Defending it at a "sacred cow" rigid rate too long is a costly affair. Neither can HK$ be "internationalised". So the only likely scenario (though not an entirely satisfactory one) would be to make some minor "adjustment" (aka devaluation) on the Peg as events develop.

    Yes, but a century gives quite a bit of time...

    Thanks for the letters.


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