Hang Seng Index and Shanghai Composite Index Technical Outlook: Weakness Persists

HANG SENG, SHANGHAI COMPOSITE – Technical Outlook:

• The Hang Seng Index could decline further following a major technical break down.
• The Shanghai Composite Index is facing some weakness within the broader range.
• How much more downside for the indices and what are the key levels to watch?

HANG SENG INDEX MEDIUM-TERM TECHNICAL OUTLOOK – BEARISH

The Hang Seng Index (HSI) is testing yet another crucial support, a break below which could open the door towards the Great Financial Crisis (GFC) low. Repeated lows in recent weeks and strong downward momentum raise the prospect of a break below at some point.

HSI is approaching near key support at the 2011 low of 16170. This follows a break in September below another key support at the March 2022 low of 18235, the March 2020 low of 21139, slightly below the 200-week moving average. Moreover, with the Moving Average Convergence Divergence indicator (MACD) continuing to be negative on higher timeframe charts (e.g. the monthly and quarterly charts), the risk of break below 16170 is high. When the MACD indicator is below zero, it indicates a downtrend, and vice versa.

Hang Seng Index Monthly Chart

Chart Created Using TradingView

Moreover, the break below an uptrend line from 2016 has triggered a major Head & Shoulders (H&S) 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. Like with all technical patterns, measured price objectives tend to serve as guides, rather than a rule. Regardless, this highlights the extent of the potential downside following the support breaks in recent months.

On the upside, HSI would need to clear last week’s high of 18164 at minimum for the immediate downward pressure to fade. However, the broader downtrend is unlikely to change while HSI holds below the 200-day moving average (now at about 21105).

SHANGHAI COMPOSITE INDEX SHORT-TERM TECHNICAL OUTLOOK – BEARISH

Like its peer, the Shanghai Composite Index is also at quite an important crossroad. It is testing converged support on the 200-month moving average and an uptrend line from 2013. Any break below the support could pave way initially towards the March 2020 low of 2647, with stronger support at the 2019 low of 2441.

Shanghai Composite Index Monthly Chart

Chart Created Using TradingView

From a multi-week perspective, the index has maintained a weak tone. However, from a multi-month perspective, the index continues to hover in a range (as the chart shows). The upper end of the range is the 2018 and the 2021 highs while the lower end of the range is the 2019 low. Unless the index manages to break below 2441, the current spell of weakness is at best consolidation within the bigger range. On the upside, at the very least the index needs to break above the August low of 3155 for the short-term downward pressure to ease.

— Written by Manish Jaradi, Strategist for DailyFX.com