Risk of a pull back for Hang Seng 40 above 27300 26900 before more upside

Hong Kong is the second best performing Asian stock market as her benchmark Hang Seng Index soared by 17% year to date (as at 24 April 2015) just behind the “red hot” Shanghai Composite Index (see performance chart below).

Most of the gain seen in the Hang Seng Index has been attributed in the month of April 2015 and a jump in liquidity from the Shanghai-Hong Kong Stock Connect program (a catch up play in terms of performance after lagging behind the Shanghai Composite since last year).

Let us take a look at its technical elements to decipher its expected performance going forward.

Key elements

• The Index is now testing the median line (resistance) of its long-term ascending channel (in green) in place since 26 October 2008 at 28600 (see weekly chart).
• The long-term MACD trend indicator continues to trend upwards steadily above its centreline and it still has room before reaching its “extreme” level seen in October 2007. This observation suggests that the on-going multi-month bullish trend remains intact (see weekly chart).
• The intermediate term RSI oscillator is overbought and has flashed a bearish divergence signal (see daily chart).
• The intermediate term Bollinger Bandwidth indicator which measures volatility remains at a 14-month high since 05 February 2014. This observation suggests that the current uptrend from 11 March 2015 low is “overstretched” and the Index is likely to see a pull-back/consolidation (see daily chart).
• The pull-back support of the former intermediate term ascending channel breakout (from 26 June 2013 low, in dark blue) is at 26900 (see daily chart).
• The 26900 also coincides closely with the38.2% Fibonacci retracement (typical wave 4 target) from 11 march 2015 low to current 27 April 2015 high (see daily chart).
• The upward sloping 20-day Moving Average (in red) is acting as support at 26670 (see daily chart).

Key levels (1 to 3 months)

Intermediate support: 27300/26900

Pivot (key support):26670

Resistance: 30150 & 30500

Next support: 25150/25000

Conclusion

Intermediate term mathematical indicators (Bollinger Bandwidth & RSI oscillator) as seen on the daily chart highlights the risk of a pull-back first towards 27300/26900.
As long as the 26670 monthly pivotal support holds, the Index is likely to see another round of potential upside movement to resume its multi-month bullish trend to target 30150 before 30500.

On the other hand, failure to hold above 26670 may damage the multi-month bullish trend for a deeper decline towards the long-term significant support at 25150/25000 (former resistance that capped the Index since October 2010).