Hong Kong stocks, the weakest link on the backdrop of global manufacturing recession

Tencent, Hang Seng Bank, CKH Holdings are under further potential downside pressure.

Yesterday, we have finally witnessed the U.S. manufacturing sector succumbed to downside pressure in line with the on-going deterioration seen in global manufacturing activities that have been weaken further by the U.S.-China trade war. The U.S. ISM Manufacturing PMI for Sep has slumped to 47.80 versus a consensus reading of 50.1 and declined further from 49.1 seen in Aug. The latest set of data represents two consecutive months of contraction (below 50) in U.S. manufacturing activities that triggered a sell-off in U.S. stocks.

After yesterday’s decline of -1.23% seen in the S&P 500; the benchmark index for the U.S. stock market, it is still the top performer year to date with a gain of 17.14%, slightly below the Shanghai Composite Index of 17.84%.   

From a tactical trading strategy perspective, one can look at the overall performance of the major global stock markets and target the weakest on back drop of an imminent global recession. The Hong Kong’s Hang Seng Index is the worst performer so far with a paltry gain of 2.97% hit by a double whammy of weak external environment and a deterioration in internal consumer/business sentiment due to the 4-month long of localised anti-government street protests.

Next, we will highlight several Hong Kong listed stocks with bearish technical elements for a time frame of 1 to 3 weeks.

Hong Kong’s Hang Seng Index the worst performer

click to enlarge chart

Hang Seng Bank (0011-HKG)

click to enlarge chart

  • Bearish bias in any bounces below key pivotal resistance of 179.70 for further potential downleg to target the key long-term support area of 153.00/149.15.
  • It has been evolving within a major descending channel in place since 03 May 2019 and it has retreated from the pull-back resistance of a former ascending support from 27 Jan 2016 after a corrective rebound of 11.7% from its 03 Sep 2019 low of 160.10.
  • Momentum remains negative as indicated by the daily RSI oscillator where it has staged a bearish breakdown below a significant corresponding support at the 45 level. In addition, relative strength analysis from the ratio chart of Hang Seng Bank over HSI suggests further potential underperformance of Hang Seng Bank against the Hang Seng Index.
  • However, a clearance with daily close above 179.70 invalidates the bearish scenario for a squeeze up to retest the 193.45 former range support from Jun/July 2019.

CKH Holdings (0001-HKG)

click to enlarge chart

  • CKH Holdings, a major conglomerate set up by Li Ka-shing, an influential business magnate and one of Asia’s richest tycoons. Bearish bias in any bounces below 73.00 key pivotal resistance for further potential downleg to retest the 15 Aug 2019 swing low of 64.30 before targeting the 59.80 support (lower boundary of medium-term ascending channel in place since 09 Apr 2019 high & a Fibonacci expansion cluster).
  • The ratio chart of CKH Holdings over HSI has continued to evolve in a downtrend since Oct 2018 which suggests further potential underperformance of CKH Holdings against the Hang Seng Index.
  • However, a clearance with daily close above 73.00 invalidates the bearish scenario for an extension of the corrective rebound from 15 Aug 2019 low towards the next resistance at 79.10 (also the upper boundary of the major descending channel from 26 Jan 2018 high).

Tencent Holdings (0700-HKG)

click to enlarge chart

  • Tencent, one of the trios from the BAT group; an acronym for high beta giant technology stocks based in Asia (Baidu, Alibaba) that derive their most of their revenue from China and it is also the 2nd highest weightage component stock in Hang Seng Index.
  • Bearish bias in any bounces below 351.00 key pivotal resistance and a break below 316.80 (range support in place since 27 May 2019) is likely to reinforce another potential downleg to target the next support at 292.70 (close to the 30 Oct 2018 major swing low & 1.382 Fibonacci expansion of the decline from 11 Apr high to 27 May low projected from 30 Jul 2019 high).
  • The stock has continued to form a series of “lower highs” below a major descending trendline resistance in place since its current all-time high of 476.60 printed on 29 Jan 2018.
  • Momentum remains negative as the daily RSI oscillator is now attempting a bearish breakdown below a significant corresponding support at the 38 level. This observation suggests a potential pre-signal for a break below the 316.80 range support.
  • The ratio of Tencent over HSI has broken below a significant ascending support in place since 30 Oct 2018 which indicates a further potential underperformance of Tencent against the Hang Seng Index.
  • However, a clearance with daily close above 351.00 invalidates the bearish scenario for a squeeze up to retest the 11 Apr 2019 swing high area of 396.00.

Charts are from eSignal 

Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.