Hang Seng, China A50 reversing hard after tough end to May

• Chinese stocks endure tough end to May, giving back gains achieved earlier in the month
• June has started with explosive gains, seeing futures threatening the downward trend

Chinese stock futures have surged on the resumption of trade on Monday, finding buying support after hitting multi-week lows on Friday. If the gains stick, it points to a potential trend change in both the Hang Seng and China A50. The gains track similar moves across the Asian region and follow a late surge on Wall Street to end May.

Hang Seng surges from 18000

Looking at Hang Seng futures first, traders ignored the bearish hammer candle printed on Friday, buying aggressively from 18000. Such has the scale of Monday’s bounce been thus far, futures have broken downtrend resistance dating back to the high set on May 20, surging back towards resistance located at 18500.

With the downtrend in RSI also broken, it feels like the Hang Seng may be about to embark on a new trend after a difficult end to May. But I’ll wait for the price action to confirm one way or another.

Should futures to break and close above 18500 consider entering a long position, allowing for a stop to be placed below the level for protection. 18960 would be the initial trade target with the May high of 19772 the next after that.

If futures can’t reclaim 18500, as was seen last Friday when they reversed hard into the close, it offers the chance to short with a stop above the level for protection targeting a push back to 18000. That would put a potential trend change on ice, pointing to selling rallies remaining the preferred option moving forward.

China A50 pops after closing below key level

The moves on the Hang Seng are similar to what’s been seen in China A50 futures on Monday with the price reversing hard from below the 50-day moving average.

As discussed in this video from Friday, this level comes across as important for the A50’s longer-term trajectory, often tested but rarely broken cleanly since early September last year. And of the two occasions it did break and close through it during this period, one sparked a reversal so strong it kickstarted a new wave of buying. It’s early days, but perhaps something similar may be seen again.

Should A50 futures manage to close above the 50-day moving average, consider entering long positions with a stop loss placed below 12353, the low set on Friday. Above, 12530 may see sellers reemerge, coinciding with horizontal and downtrend resistance. If it were to give way, 12712 and 12795 are two potential trade targets.

However, with RSI and MACD still pointing to downside risks, should A50 be unable to hold above the 50DMA, traders could consider selling with a stop above the level for protection. Below 12353 there’s not a lot of visible support evident until below 12200 where futures attracted bids in April.

-- Written by David Scutt

Follow David on Twitter @scutty