HSI hinting at potential turnaround

On March 14, 2024, the Hang Seng Index (HSI) closed marginally lower by 0.71per cent or 120.45 points at 16,691.67. Despite the drop in the index component stocks, the HSI underwent a notable turnaround in January 2024. Prior to the turnaround, it experienced a prolonged decline following its peak of 22,688.91 on Jan 27, 2023, attributed to various factors such as technology clampdowns, economic contraction, and defaults among property developers.

This significant turnaround can be credited to a series of strategic interventions orchestrated by the Chinese Communist Party’s Politburo. These measures included mobilising a national team comprising state-backed institutions, which injected capital into the market through the acquisition of exchange-traded funds. Moreover, there was a directive for Shanghai-listed firms to initiate share buybacks, alongside regulatory actions aimed at tightening controls on short-selling activities. As a result of these interventions, the HSI experienced a significant resurgence from a trough of 14,794.16 on Jan 22, 2024. Notably, this figure is closely aligned with the critical “support level 2” range spanning from 14,750 to 15,000, depicted by the red circle intersecting with the “descending lower trend line”.

By Mar 4, 2024, the HSI had surged impressively by 10.77 per cent, signifying an outstanding recovery. At its 2024 Q1 peak, the index exhibited a remarkable rebound of 12.94 per cent.

Bullish scenario

The recent trajectory of the HSI demonstrates its resilience as it trends towards the “descending upper trend line”, characterised by successive higher highs and higher lows. This notable recovery has not only bounced off the Simple Moving Average (SMA) 50 line but also continues its ascent towards the significant “resistance level 1” ranging from 17,400 to 17,650. Of particular significance is the confluence of this resistance range with the SMA 200, highlighted by the green-circled area. A breach above this level holds considerable importance, potentially heralding a bullish breakout scenario for the HSI, transitioning from a downtrend channel to an uptrend channel.

If the above breakout materialises, there is potential for further upward momentum, with a challenge to the subsequent significant resistance level, labelled as “resistance level 2”, ranging from 18,850 to 19,200. However, the realisation of this scenario hinges greatly on China’s economic outlook and its ability to attain the targeted 5 per cent GDP growth goal set for 2024.

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Bearish scenario

The outstanding rebound of the HSI by a substantial 14.2 per cent from its low on Jan 22, 2024, to March 13, 2024, is a noteworthy development. However, this strong recovery prompts consideration of a potential correction, indicating a bearish scenario.

In such a scenario, the immediate support level would likely be observed within the range of 16,100 to 16,350 (support level 1), which corresponds to the resistance level turned support level breached on Feb 21, 2024. Remarkably, this level coincides with the SMA 50, emphasising its importance. A correction to this “support level 1” implies a decline of approximately 5 per cent. We view this short-term retracement as a potential entry point, provided the HSI remains above this level. However, a failure to hold at this level could indicate the beginning of a more sustained decline, potentially revisiting “support level 2”.

The writer is dealer at Phillip Securities