HANG SENG, HK Equities, HSI – Technical Outlook:

• The Hang Seng Index is on the verge of another technical break down.
• The index risks a drop towards the Great Financial Crisis low.
• What are the key levels to watch?

HANG SENG INDEX TECHNICAL OUTLOOK – BEARISH

Accelerating downward momentum in the Hang Seng Index (HSI) raises the risk of a retest of the Great Financial Crisis (GFC) low.

The index is now attempting to break below vital converged support, including the 2011 low of 16170, roughly coinciding with 15900 (the 78.6% retracement of the 2008-2018 rally) – the last significant support ahead of the 2008 low of 10676. The 14-month Relative Strength Index, a measure of momentum, is the lowest in decades, heightening the odds of a drop towards 10676 in coming months.

Hang Seng Index Monthly Chart

Chart Created Using TradingView

A buoyant mood on Wall Street Friday failed to spill over to stocks in Hong Kong and China– the Hang Seng Index fell over 4% on Monday morning, while the Shanghai Composite Index fell 1%. Investors were hoping for some economic growth-boosting measures to be announced at the Communist Party of China’s 20th National Congress that closed over the weekend. However, the meeting was mostly about personnel changes. In reaction, Hong Kong stocks plunged to a new 13-year low on Monday.

In recent months, the Hong Kong benchmark index has broken one support after another, with the most significant one being the break below an uptrend line from 2016 (that came at about 22600). That breach triggered a major Head & Shoulders pattern (the left shoulder is at the 2015 high, the head is at the 2018 high, and the right shoulder is at the 2021 high), implying a potential move towards the GFC low of 10676. Importantly, the fall below 22600 has also cracked Hong Kong stocks’ long-term, structural uptrend.

On the upside, for the immediate downward pressure to fade, HSI would need to clear the early-October high of 18164 and the March low of 18235. HSI would need to regain the 200-day moving average (now at about 20935) to neutralize medium-term bearish positioning. Until then, the path of least resistance remains sideways/down.

— Written by Manish Jaradi, Strategist for DailyFX.com