Featured Trade Hang Seng is testing key resistance zone

Short-term technical outlook on Hong Kong 50 Index

Key technical elements

• Since this Mon, 05 Nov low of 25747 printed after a 3.5% decline seen from the 26300 key medium-term pivotal resistance on last Fri, 02 Nov U.S. session, the Hong Kong 50 Index (proxy for Hang Seng Index futures) has started to drift upwards and it added on to its gains in today, 07 Nov Asian session as the market awaits for the U.S. mid-term elections results. The consensus is that the Democrats regain the House and Republicans maintain control over the Senate. As at 11.54 a.m (SG time), data from Bloomberg has indicated Republicans are leading in the race for the House (139 versus 132) with a total of 435 seats up for voting.
• Interestingly, since its Mon, 05 Nov low of 25747, the Index has started to evolve into a minor “Bearish Flag” configuration which indicates a potential “dead cat bounce” to retrace the prior 3.5% decline seen last Fri.
• The key short-term resistance stands at 26300/400 which is defined by the upper limit of the “Bearish Flag”, the pull-back of the former minor ascending support from 30 Oct 2018 low and a Fibonacci cluster (50% retracement of the prior decline from last Fri, 02 Nov U.S. session high of 26772 to 05 Nov low & 1.236 projection of the on-going rebound seen from 05 Nov low).
• The daily RSI oscillator is now back its significant corresponding resistance zone of 50/60 with the shorter-term 1-hour Stochastic oscillator that is hovering within the overbought region. These observations suggest that the recent upside momentum is getting “overstretched” where the Index faces the risk of a bearish reversal at this juncture.

Key Levels (1 to 3 days)

Intermediate resistance: 26300/400

Pivot (key resistance): 26700 (medium-term pivot)

Supports: 25950 (trigger), 25090 & 24490/360

Next resistance: 28000

Conclusion

The on-going rebound from this Mon, 05 Nov low of 25747 has reached a significant resistance zone with momentum indicators that are indicating an “overstretched condition to the upside”. A downside reversal in price action cannot be ruled out at this juncture.

If the 26700 key medium-term pivotal resistance (also the medium-term descending channel resistance from 07 Jun 2018 high) is not surpassed and a break below 25950 (the lower limit of the bearish flag) is likely to trigger a potential implusive down move to target the next near-term support at 25090 in the first step.

However, a clearance above 26700 invalidates the bearish scenario for an extension of the corrective rebound towards the next resistance at 28000 (the pull-back resistance of the former major ascending support from Feb 2016 low & 50% Fibonacci retracement of the decline from 07 Jun 2018 high to 26 Oct 2018 low).

Charts are from City Index Advantage TraderPro