Click on chart for larger image
For the sake of clarity, here is the writing on the above Charts, followed by the Forecast:
CHART 2 (daily)
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The 150 day SMA (Simple Moving Average) is red in colour.
It is significant that:
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(1) the price has closed beneath this SMA and the 50 day SMA (in green) which has lost momentum and is moving sideways
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(2) the price not only broke down through the Neckline (in orange) on Friday Jan 22, 2010 but it gapped down in the form of a Breakaway Gap.
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CHART 1 (weekly)
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To give perspective, here is a weekly chart of the Hang Seng Index from end of June, 2000 to Jan 22, 2010
The 30 week SMA (Simple Moving Average) is brown in colour.
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It is significant that:
(1) the price has closed beneath this SMA
(2) the price has broken down through the Uptrend line (in blue) which is drawn from when the Great Bear Market Rally began - in March, 2009.
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(3) the price has broken down through the Neckline (in orange) of the recent Head & Shoulders . When an H&S pattern appears at this point in a Primary Wave Up it often signals that a Reversal of Trend is likely. It is essential to keep in mind the probabilistic nature of Market Forecasting.
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The Forecast:
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The following Forecast will become more firm if/when the Hang Seng closes 3% beneath the point where it broke down through the Neckline of the H&S Pattern.
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That is, the Neckline was at approximately 20,830 on Friday January 22, 2010 when the price went to a Low of 20,250 and a Close at 20,726.
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So I am looking for (and expecting soon) a Close of at least 20,204.
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Once this occurs then the following will likely happen:
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(1) There will be a Pullback Rally where the price climbs back towards the neckline. Short sports will be waiting for this.
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(2) The Measurement Formula of the H&S pattern indicates that the Hang Seng will fall at least 948 to a minimum of 18,778. See the red vertical lines on the charts above.
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(3) Once the Index lands in the area of 18,778 it will most likely bounce up before commencing a frightening plunge. This decline will most likely take the form of a series of ever lower highs and lower lows. The Bear won't be satisfied until he has broken just about all the market players. .
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This would be similar to the way the Dow Jones Industrial Average fell after its initial October 1929 collapse and countertrend Bear Market Rally (a rally that lasted 5 months). What came after that 5 month long Bear Market Rally did not hit bottom till July 8, 1932 - two years later. Those two years were the first 2 years of the Great Depression.
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One of my favourite books is Reminiscences Of A Stock Operator By Edwin Lefevre, Copyright (c) 1923 by George H. Doran Company ISBN: 0-934380-11-2. It is dedicated to Jesse Lauriston Livermore, the gentleman some officials tried to blame for the Great Crash of 1929. As Edward D. Dobson writes in the Introduction to the Traders Press edition of 1985, the one I possess: "Note that this work of fiction is in fact a thinly disguised biography of the most colorful market speculator in the stock and commodity trader's Hall of Fame, Jesse Livermore."
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In the book, in Chapter VIII, page 89, the "fictional" trader declares: "The analysis of the week that had passed was less important to me than the forecast of the weeks that were to come."
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I like that.
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Good luck to all of us.
James Leo Donoghue in Australia, Sunday 24th January 2010 8:30 PM
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