Textbook trades in the Hong Kong stock index

The Hong Kong stock index has thrown up some textbook examples in how to use chart-trading methods. John C Burford explains.

This week, I am literally spoiled for choice in my selection of a market to cover where I can illustrate how to use my tramline methods to extract swing trading profits. After all, that is always my intention with these Trader posts.

If you can pick up just one useful idea on how to draw tramlines, or how to use Fibonacci, or how to apply the Elliott wave principle, then my mission is accomplished.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

Today, I want to analyse the Hong Kong index (formerly known as the Hang Seng), because the chart patterns are absolutely textbook. In fact, it is an object lesson in how to apply my methods.

The rally in the Hong Kong index runs out of steam

The Hong Kong daily chart is reminiscent of the Nikkei chart I have featured recently. In fact, the Chinese and Japanese are major trading partners and if one catches a cold, the other at least sneezes in sympathy.

Advertisement
Advertisement - Article continues below

But there are some striking differences in the charts. For instance, the October 2014 low is much higher than in the Nikkei relative to the June 2013 and the March 2014 lows. That means I have no obvious tramlines to work with, which I did in the Nikkei but I do have a wedge.

Here is the daily chart going back to 2012:

14-11-19-MWT-1

The move into new highs during the summer was accompanied by waning buying power, demonstrated by the very large positive-momentum divergence.

That was a warning the rally was likely running out of steam.

The powerful weapon every trader should use

And now I want to show that wedge:

14-11-19-MWT-2

The overshoot of my upper wedge line is another warning to prepare for a swift reversal. That is because an overshoot is a good indication that if the market reverses back below the line (creating the overshoot), the decline is normally a very swift pull-back to the lower line, which is exactly what did occur.

Advertisement
Advertisement - Article continues below

And note the decline into October was stopped at the Fibonacci 62% level:

14-11-19-MWT-3

Now just admire the decline it was stopped precisely at the Fibonacci 62% level. This 62% Fibonacci target is a very powerful weapon in your armoury I encourage every trader to make full use of it.

A short-term trader would be taking profits near this level for a tasty 2,000-point profit in two weeks or so.

The ideal place to enter a short trade

Now let's zero in on that top, because it offers yet another clear reversal warning:

14-11-19-MWT-4

I have a gentle rising wedge at the top, and within it, I can count five clear waves on declining momentum.

This particular five-wave pattern is not an Elliott wave motive pattern, but is a recognised reversal pattern within a wedge when it comes at the end of a strong trend. And it performed that function beautifully!

Advertisement
Advertisement - Article continues below

The negative-momentum divergence, combined with the five mini waves within the top wedge is a very reliable reversal signal. And when the lower wedge line was broken, that was the ideal place to enter a short trade (on a resting stop).

Will we get a textbook trade?

So now we have the predicted sharp decline to the lower wedge line support now for the relief rally. I wonder what form that will take a textbook A-B-C rising to the Fibonacci 62% level perhaps? Am I asking too much?

14-11-19-MWT-5

My prayers were totally answered with an absolute textbook relief A-B-C rally. On Monday, the C wave stopped bang on the Fibonacci 62% level with a negative-momentum divergence thrown in as a bonus. Isn't that pretty?

In addition, the relief rally has formed into another rising wedge with the lower line being broken yesterday. Again, this is a bearish sign. Here it is on the hourly:

14-11-19-MWT-6

Aggressive traders would be shorting at the Fibonacci 62% level, while more conservative traders would favour the entry at the lower wedge line. And note the negative-momentum divergence at the C wave high another clue the trend was about to reverse back down.

Here's the short term outlook

So what is the outlook in the short term?

Advertisement
Advertisement - Article continues below

If there is a genuine breakout of a rising wedge, the market usually retreats to the origin of the wedge in this case, the B wave low. But there is further downside potential if my Elliott wave labels are correct:

14-11-19-MWT-7

The market may be entering a third wave currently the key is the wave 1 (or B wave) support level. If it can be breached with force, that would indicate we would be in a third wave either wave 3 or a C wave.

In the short term, the market is entering chart support, which could result in a small bounce from current levels. But already, there have been several excellent swing trades available to those who watch this market I suggest you do likewise!

Advertisement

Recommended

Visit/519524/how-my-2019-spreadbetting-tips-fared
Share tips

How my 2019 spreadbetting tips fared

Matthew Partridge reviews performance of his 2019 spreadbetting tips. This year’s winners include Bellway, JD Sports and Taylor Wimpey.
17 Dec 2019
Visit/519285/bettingon-politics-some-safe-labour-bets
Spread betting

Betting on politics: some safe Labour bets

Matthew Partridge outlines a few flutters on what should be safe Labour seats in the general election.
10 Dec 2019
Visit/518916/ds-smith-will-deliver
Spread betting

DS Smith will deliver: here's how to play the share price

Packaging group DS Smith is profiting from the online retail boom. Matthew Partridge explains how traders can play the share price.
3 Dec 2019
Visit/518908/betting-on-politics-28
Spread betting

Betting on politics: don't put your money on the SNP

Scottish voters are strongly opposed to another independence referendum, says Matthew Partridge. That opens up a few tasty punts against he SNP.
29 Nov 2019

Most Popular

Visit/520525/currency-corner-how-high-can-the-pound-go-against-the-euro-in-2020
Currencies

Currency Corner: how high can the pound go against the euro in 2020?

In the month in which we should finally leave the European Union, Dominic Frisby takes a look at the pound vs the euro and asks just how high sterling…
13 Jan 2020
Visit/investments/property/house-prices/600638/uk-house-prices-may-be-heading-for-a-boris-bounce
House prices

UK house prices may be heading for a Boris bounce

The latest survey of estate agents and surveyors from the Royal Institution of Chartered Surveyors is "unambiguously positive" – suggesting house pric…
16 Jan 2020
Visit/economy/600632/money-minute-friday-17-january-uk-weakness-likely-to-continue
Economy

Money Minute Friday 17 January: UK weakness likely to continue

Today's Money Minute previews UK retail sales figures the UK, inflation data from Europe and industrial production from the US.
17 Jan 2020
Visit/520598/money-minute-thursday-16-january-a-batch-of-company-results
Economy

Money Minute Thursday 16 January: a batch of company results

Today's Money Minute looks ahead to results from a host of UK companies, plus the latest unemployment figures from the US.
15 Jan 2020