Originally published by guppytraders.com
Critics of technical analysis often speak of coincidence and meaningless lines. The Hang Seng is a fine example of repeated coincidence that gives a well-defined trading edge when technical analysis is applied.
Starting with the long view on the weekly we see that the placement of the uptrend line was used as a support level from 2016 to early 2018. The index moved below the trend line and the trend line changed its polarity. It switched from a support feature to a resistance feature.
Once broken, the line is not discarded. It is projected into the future and as the current index activity shows, it now acts as a resistance feature. The index is reacting away from the uptrend line and we can anticipate that this behaviour will continue for some time.
This reflects a move from a strong uptrend – the line acts as a support feature – to a weaker uptrend – the line acts as a resistance feature.
The next feature on the chart is the prevalence of the horizontal support and resistance level that create well defined trading bands. Support is near 25,200 and resistance near 28,100. The width of this trade band is projected upwards to give an upside target near 33,800. We can argue about the exact placement of these support and resistance levels, but we cannot dispute that they provide a very useful guide to future index targets when a breakout from a trading band develops.
By combing this analysis of the weekly Hang Seng chart, we can conclude that the current uptrend faces initial resistance at the value of the uptrend line and long-term resistance near the 33,800 level. This means traders will tighten stop to protect profits. They will also be ready to take short positions as the index retreats from the trend line. A fall below 28,100 confirms a new downtrend with a downside target near 25,200.
On balance we remain bullish but note that the momentum of the uptrend is limited by two strong resistance features.
Daryl Guppy is a leading international financial technical analysis expert and special consultant to Axicorp. Guppy appears regularly on CNBC Asia and is known as "The Chart Man". Disclaimer: Daryl Guppy is not a financial advisor. These notes are for educational purposes only and provide an example of applied technical analysis.