Outlook for the Hang Seng Index

Global decoupling and the troubled Chinese housing market have really taken their toll on Chinese equity markets. Chinese equities have been generally falling for multiple years. But more recently, sentimemt has been gradually warming up to Chinese stocks. Is it finally time for Chinese markets to rebound?

In the chart directly below, you can see the long-term trend for the Hang Seng Index. It has been a bearish downward price channel. A few months ago, we saw the price crash below support of this channel, which was very bearish. The melt-down was quickly bought up once the chinese government announced that it would be providing aid to support its falling stock market.

Government aid for stock markets is one of the most dovish things you could hear for equities. And the market responded accordingly. But I will remain skeptical until I see the price climb out of this long-term channel.

Chinese economic data has been showing signs of improvement. The recent manufacturing data release showed a big spike in manufacturing activity. Also, CPI has been on the rise for several months. These are things that are indicative of economic expansion. Ideally you would want to see economic expansion to be confidently bullish towards equities.

So far, for the majority of this year, the index has continued to make higher highs and higher lows. Any short- term vectors you are following would have an upward slope. It is safe to say that things are bullish in the short-term. But will this trend last?

As long as Chinese economic data is indicating an expansion and the price action remains in its upward vectors, then I would remain bullish. After all, China is the second largest economy in the world, and its equity markets can not fall forever.

But due to the fact that the long-term trend is down, I would be very cautious until we see a breakout to the upside of the long-term channel that I have mentioned. There is always a possibility that the recent economic data is a fluke, and contraction will return. If the short-term price action begins to make lower lows, then I would definitely consider minimizing my exposure to Chinese markets. Until we get that long-term breakout, I would definitely be more of a cautious trader and more of a swing trader.