Hong Kong Stock Exchange – Weekly Stock Market Review

The Hong Kong Stock Exchange (Hang Seng Index) has been enjoying a good run up since the crash of 2007. This has prompted a lot bullish calls especially now, after almost four years being in the positive territory after the low of Oct 2008. The Elliott Wave Analysis on the other hand does show weakness and it does highlight caution going into 2013.

I have two possible long term Elliott Wave counts for the Hong Kong Stock Exchange, one bullish and the other bearish. But, in the intermediate term, both the counts are pointing to a down side and has a bearish tone.

Hang Seng Index Primary Count

This chart captures the move on the Hong Kong Stock Exchange since the top of 2007. This is the Primary count and it labels the drop from 2007 till end of 2008 as a five wave impulsive move. This wave is labelled as Primary wave A. This wave is confirmed with the corresponding structure on the MACD. What followed next was the corrective phase which started off looking like a strong impulsive wave. It then stopped short and started to slide sideways instead. I’m of the opinion that this corrective wave is Primary wave B. The wave B ended in Nov 2010.

Hong Kong Stock Exchange Weekly Primary Elliott Wave Chart 22 Dec 2012

Following the end of the Primary wave B, the Hang Seng started to slide down rapidly and lost about 35% of its value by Oct 2011. This rapid slide is labelled as Major wave 1. It has the characteristics of a classic impulsive elliott wave. Naturally, this sell off was followed by the corrective phase which is labelled as major wave 2 which is near completion. This count fits well naturally and that gives the count a lot of weight. Sometimes, the counts may not fit well either in character or in structure and we may need to adjust it in a complex manner. I have seen that such counts turn out to be invalid as the market progresses. In this case we have a clear cut count.

This means that the Hong Kong Stock Exchange is going to embark on wave 3 to the downside. As we know, the third wave of Elliott Waves is the strongest and also the longest. We also know that it is usually 1.62 times the wave 1. That gives us a projection of target of around 8500 points. This would be below the low of 2008.

Hang Seng Index Alternate Count

The Alternate count states that the crash of 2007 is actually a A-B-C correction and the Hong Kong Stock Exchange is in a multi year bull run. The wave 1 of this bull run has completed and wave 2 is in progress. The wave 2 is further sub divided into an A-B-C correction with the waves A and B completed. The next anticipated wave is wave C to the downside to complete Major wave 2.

Hong Kong Stock Exchange Weekly Alternate Elliott Wave Chart 22 Dec 2012

Based on wave A, if wave C is equals to wave A, the projected price target for Hang Seng is 13850. This level is also 78.6 % of Major wave 1.

Both the counts are pointing to a downwards move for the Hang Seng in the coming year. The only difference is the degree of drop. Once we have the first downwards sub wave, we would then get a better idea on which count is the more probable one.

A word of caution is that it is extremely difficult if not impossible to pick the top. This makes it a very risky trade. The Hong Kong Stock Exchange is looking toppish and it would be wise to offload some positions and wait for a clearer picture. As mentioned earlier, the first wave down will show us where the market is headed next and it would be wise to let the market form that wave.