hang seng index testing 23100500 resistance ahead of u s nonfarm payrolls 1828942016

Daily Outlook, Thurs 01 Sep 2016

(Click to enlarge chart)

What happened earlier/yesterday

The Hong Kong 50 Index (proxy for Hang Seng Index futures) has traded sideways yesterday below our predefined short-term pivotal resistance of 23100.

In today’s morning session (01 Sep 2016), the Index has managed to recover from its opening losses by staging a rally of 0.8% to print a current intraday high of 23085 due to a better than expected China’s official NBS Manufacturing PMI data for August (50.4 versus an expectant of 49.9) which is also in line with the private sector’s Caixin Manufacturing PMI of 50.0 for August.

Despite the earlier push up seen in price action of Index, it is still below the 23100 short-term pivotal resistance and based on current technical elements, we do not think that the latest set of China Manufacturing PMI data is able to alter the current sideways configuration of the Index. More details as per explained below.

Please click here for a recap on our previous daily short-term technical outlook/strategy.

Key elements

• Correlation analysis between similar asset classes has identified a strong link between the current movement of the S&P 500 and the Hang Seng Index which has a Pearson’s correlation coefficient of +0.75 (refer to the last chart). The fundamental reason is due to the fixed USD peg regime adopted by the Hong Kong central bank which means the monetary policy of Hong Kong will be dependent on the U.S. Federal Reserve. In near term, the probability of the next U.S. policy interest rate hike has increased for the remaining months of 2016 due to the recent hawkish comments from Fed officials (Yellen, Fischer & Dudley) which have reinforced the current weakness seen in the S&P 500 in place since 23 August 2016 high of 2193.
• Current technical analysis of the S&P 500 has indicated further potential weakness ahead towards the 2155 support in the near term which suggests any potential gains in the Hang Seng Index is likely to be capped by the 23500 medium-term pivotal resistance. Please click on this link for a recap on the short-term technical outlook for S&P 500 published yesterday.
• Even though, the Hang Seng Index has broken below the lower boundary of medium-term bullish ascending channel in place since 27 June 2016 low but there is a lack of follow through in terms of downside momentum as the Index remains above a near term support at 22740 in place since the 17 August 2016 minor swing low.
• The next intermediate support rests at 22200 which is defined by former minor swing high areas of 26 July/01 August 2016 and close to the 23.6% Fibonacci retracement of the recent up move from 24 June 2016 low to 18 August 2016 high of 23210
• Current price action of the Index is now testing the minor range top in place since 18 August 2016 at 23100. In addition, the hourly (short-term) Stochastic oscillator has reached an extreme overbought level which suggests limited upside potential for price action of the Index at this juncture.

Key levels (1 to 3 days)

Intermediate resistance: 23100

Pivot (key resistance): 23500

Supports: 22740 & 22200

Next resistance: 24500

Conclusion

Maintain bearish bias but 22740 needs to be broken down in order to add impetus for a potential decline to target the next support at 22200 in the first step.

However, a break above the 23500 medium-term pivotal resistance is likely to invalidate the preferred bearish scenario for another round of impulsive up move towards the next resistance at 24500 (please click on this link for a recap on our latest weekly technical outlook/strategy published on Monday,29 August).

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