With all the attention squarely on the US nonfarm payrolls data release tonight, we turn our attention to Hong Kong, which is on a spectacular bull run despite the multiple global macro risk events that are looming.
In the context of global equities, the Hang Seng stands out from the crowd with an index Price Earnings Ratio (PER) of 12, compared to a PER of 17 for the Shanghai Composite (SHCOMP), and 16 for the Taiwan Stock Exchange (TAIEX). Needless to say, the developed markets are relatively more expensive, with the PER for Australia (ASX200) at 24 and the US (S&P500) at 20.
In addition, the recent approval of the Shenzhen(SZ)-Hong Kong(HK) Stock Connect (SZ-HK Connect) may provide a further uplift for the Hang Seng, as southbound flows into the HK market present better value for mainland investors looking for diversification.
Besides the fundamentals, technically speaking, the Hang Seng currently trades at an interesting level. The Q42015 double top levels stand at 23,423 (26 Oct 2015) and 23,342 (04 Nov 2015). The index is currently at ~ 23,300 at the time of this writing, while the Average True Range (ATR) reading on a daily chart is currently at about 250 points. This indicates that the magnitude of the daily moves in the Hang Seng is approximately 250 points, meaning that we are within striking distance of the above-mentioned double top levels. Should the double top to be breached, we expect the Hang Seng to trade even higher:
Source: Saxo Bank
Plotting Fibonacci lines onto the Hang Seng (HK50.I) from the April 2015 high (28,619) to the Feb 2016 low (18,029), the Hang Seng is currently flirting with the 50.00% retracement levels, at 23.324. A breach of this resistance level would open up a test of the next Fibonacci level at 24573.6:
The Slow Stochastics (9,5,5) indicator has modelled the turns in the Hang Seng well, and we just had the bullish crossover on 01 Sept 2016:
Switching to weekly lenses, we also see a Head and Shoulders bottom, potentially reversing the downtrend from the start of 2016:
Buy HK50.I @ 23,425, just above the double top levels in Q4 2015.
We base our stop on 2 x ATR*, i.e. 23,425 - 2(250) = 22,925
*ATR = Average True Range, a measure of the degree of price volatility.
25,137, the measured distance between the bottom of the head and the neckline of the pattern, applied to the breakout point, for a gain of 7.3% and a Reward to Risk ratio of 3.4.
By end Q4, 2016
— Edited by Clare MacCarthy
Non-independent investment research disclaimer applies. Read more