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Hang Seng index technical outlook: how much more downside?

Hang Seng continues to drift lower; however, the broader uptrend for HK/China stocks hasn’t reversed and what is near-term outlook and what are the key levels to watch?

Source: Bloomberg

Hang Seng index technical outlook - bullish

The gradual drift lower in the Hang Seng Index (HSI) reflects some of the unwindings of extreme overbought conditions. While the index could have a bit more downside in the near term, it is too soon to conclude that the uptrend has reversed.

The HSI index rose over 55% from a low of 14597 hit in October – the lowest level since the Great Financial Crisis. The 14-day Relative Strength Index rose above 80 at the end of January – the highest in two years. Levels above 70 are considered to be overbought and the closer the RSI goes toward 100, the more difficult it gets for a market to sustain the pace and the extent of the gains.

Price facts

  • Despite the recent retreat, the Hang Seng Index (HSI) hasn't broken the higher-tops-higher-bottom pattern (sign of an uptrend) on the daily charts. Moreover, the breakin January above the 200-day moving average confirms that the short-term trend is bullish.


  • China focused equity funds have seen outflows in the past couple of weeks. However, on a four-week rolling average basis, flows continue to be positive.


  • China's ending of its zero-Covid policy and signs of easier policy stance is leading to a re-rating of economic growth prospects - latest measures to boost the property sector. This follows less regulatory pressure on China's internet and gaming sectors. Also, easing of Sino-US tensions is supportive. Notwithstanding the recent rebound, Hong Kong's stocks were trading at the cheapest level in more than ten years.

    Risk: from a longer-term perspective, structurally subdued Chinese economic growth on deteriorating demographics poses a headwind.

On technical charts, the index has pulled back from quite a strong ceiling on a horizontal line from early 2022 (at about 22525), coinciding with the 89-week moving average. In the process, the index has fallen below minor support at the late-January low of 21383. The trend on intraday charts (hourly for instance) is down, and there is no sign of reversal yet.

Hang Seng daily chart

Source: MetaStock

However, on higher timeframe charts, including the daily charts, the index is consolidating within the four-month-long uptrend, as the color-coded candles show. Market breadth is still strong even after the retreat - 88% of the Hang Seng Index members are above their respective 100-DMA, and 64% of the members are above their respective 200-DMAs.

The index is approaching a crucial converged support area: the early-December high of 19926, coinciding with the 89-DMA and the 200-DMA. Stronger support is on the lower edge of the Ichimoku cloud cover (now at about 18000), roughly around the late-December low of 18885.

The downside could be contained within the 18885-19950 area. The index would need to break below 18885 for the four-month-long upward pressure to reverse.

Hang Seng daily chart

Source: TradingView

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