How high can HSI go? Past Hang Seng Index crises in 2 charts

One must not be overly bullish or bearish lest one gets carried away. This is my personal experience with the stock market since the late 90s. I tried to put my experience across in this post “Is this time different for the Straits Times Index?”

I find it important to study the past to find clues to the future. In addition, one must not be overly bullish or bearish because if there is one thing that never changes in the stock market, this is it – the highest chance for a sudden reversal or short squeeze to come is when one is most bearish –trading psychology 101.

 

Here we are less than 2 weeks later with markets much higher. Food for thought: how much more can it go? In this post I want to look at the Hang Seng Index.

 

HSI how about retrace 50% to 5-year high?

  1. There is a key feature in HSI chart. This is a prominent 5-year high.
  2. This was major resistance prior to prior to breakout brought by excitement over Shanghai Hong Kong Connect (a false break).
  3. Another prominent feature is a 4-year channel (light blue).
  4. Considering that HSI may be oversold and ripe for correction, how high to retrace?
  5. Previous lows offer usual support-turn resistance levels such as points 1 and 2 (red bubble).
  6. But point 3 offers optimum pullback to meet confluence of 5-year high and 4-year channel.
  7. This is also a 50% recovery of losses which is a number that showed up strongly when we looked at the history of another Asian stock market index – the Straits Times Index.
Hang Seng Index optimum retracement from weekly chart

Hang Seng Index optimum retracement from weekly chart

 

So much retracement! Is this possible?

Possible and probable. Unless this time is really different, a look at the performance of the Hang Seng Index during the last 3 major crises shows similar patterns – big drop, very bearish sentiment, kaboom! strong rally probably fuelled by short squeeze follows.

Hang Seng Index performance following burst of Subprime Crisis

Hang Seng Index performance following burst of Subprime Crisis

  1. Following burst of Subprime Crisis (see above chart), HSI loses 35% from the top by March 2008.
  2. Market top was November 2007. Very sharp losses over 4 months. Very bearish.
  3. By early May 2008, Hang Seng recovers 50% of losses. Took 2 months only.
  4. Hang Seng Index was trading at 7900 in January 1998 during the Asian Financial Crisis (see below chart).
  5. We know 7900 was not the bottom because HSI reach bottom later around 6500 in August a few months later.
  6. Before the crisis, market top was nearly 17000. This was in August 1997, 5 months earlier. August to January more than 50% loss. Very bearish.
  7. Amazingly the index rebounded after January to hit a temporary high near 12000 in March. 50% rebound. 2 months.
  8. Following burst of Tech Bubble, Hang Seng Index lost 25% from the top. This was between March – May 2000. Very bearish.
  9. By July, the index recovered almost 100% of losses to build a double top.
Hang Seng Index performance during Asian Financial Crisis, Tech Bubble

Hang Seng Index performance during Asian Financial Crisis, Tech Bubble

Strong retracement is possible and probable. Proof is in these charts. Before we know it, market swings from very bearish to very bullish which becomes ripe for another correction. Prepare yourself with this 9-point stock market crash guide.

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Soh Tiong Hum is Director of TerraSeeds Market Technician Pte Ltd. TerraSeeds is a trading educator in Singapore since 2005.   Soh's Twitter account @sohtionghum was ranked #23 out of The Top 70 Twitter Accounts To Follow In 2015 by MahiFX.   Disclaimer notice: "I do not have a financial advisor's license. I am not qualified by any regulator to give financial advice. I do not know you the reader. Your investment means and motive may be different from me. My posts here are based on observations and meant for education. I am not responsible for for any consequence from your actions."
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