Happy New Year to you all and welcome to my newest subscribers. Looks like 2024 is going to be a tricky market to navigate if the first handful of days trading are anything to go by.
The Chinese New Year kicks off 10th February 2024, and this new lunar cycle we enter the “Year of the Dragon”. I won’t confess to being a fan of the Mickey Rourke 1985 Crime Thriller of the same name, but I am interested in market sentiment and how cultural trends affect those markets in a positive and negative way. So I am going to dive into the shallow end of the Hang Seng Index and what this New lunar cycle could mean for this Chinese Index in 2024.
Last year I wrote a piece on China titled, “We Need to Talk About China”, I’d suggest you have a read of that short article for a guide to my wider view on China if you were so minded. Click the link here We Need to Talk About China, otherwise continue to the article below.
From a cultural stand point for a lot of Chinese people the turning of the New Year represents a clean slate and is assigned one of the twelve animals of the Zodiac, in this case the “Wood Dragon”. The Dragon represents strength and most importantly good luck. In essence, you don’t want to be wasting capital in the Year of the Rabbit, you want to reserve capital for these more ‘lucrative times’. You can take that with a grain of salt if you like. Either way, Chinese People have 7 days off work to go and be with their families. They draw a line in the sand of the last year and move forward into the New (not too dissimilar to our New Year Resolutions in the West). Its common to close off positions or start new ones.
It sounds crazy perhaps, but it is likely that Chinese fertility rates will increase comparatively as parents target to have their child born in this more fortunate of Years and with Household formations come increased consumer expenditure, perhaps driving the historically lack luster Chinese Household Consumption up as a % of GDP.
It’s the 10th Jan as I write, and we are one calendar month away from the Chinese New Year (10th Feb), the Hang Seng just printed a local lower low potentially breaking a double bottom (“W”) pattern. This doesn’t bode well considering the Chinese Tech Darlings of the past have fallen on harder times given the CCP’s policies and recent tactics. Companies like BABA 0.00%↑ and NIO 0.00%↑ have underperformed their US Competitors and the China ETF PGJ 0.00%↑as a yardstick is down 26% YoY.
The Hang Seng analysis above looks like a confirmed break out to the downside, with a possible target level 15,000 and perhaps even as low as 14,500 to retest the lows of October 2022. The 200DMA seems light years away at 18,500.
If we zoom out and look at the HSI Daily Chart above, as far back as the last bottom in October 2022 (green line), we can see the parabolic journey to January 2023 (red line) at which point we had multiple ascending wedge patterns for the rest of 2023 to the point were we could 1/ reverse or 2/ continue towards the October 2022 lows. You will note that it was January 2023 (just pre the Chinese New Year of the Rabbit) when the top was in and the reversal started. Market sentiment and timing around the Chinese New Year is important.
That possible negative move being said, looking at the HSI Stochastic RSI indicator above and we are a handful of days away from a possible bottom. What I think is more probable is that we hover around this range given the Chinese New Year and close out the Chinese Year somewhere around 15,500 - 16,000, but an earlier move is just as possible, but this sets up a momentum change for the rest of the year. It also provides wider technical structure in the form of a W pattern with the first bottom in October 2022 and the second higher bottom at Jan/Feb 2024.
On a purely technical basis you could see as high as 30,000 for HSI, but this is extremely bullish and less likely. But if it were to happen, the Year of the Dragon would be the year to do it. A quick check 12 years ago and the growth % in the HSI was 22.90%, so I would suggest it more likely that in FY2024, we retest the highs of January 2023 above the 20,000 level.
What is most likely is that the HSI tags its 200DMA in the next 12 months at the 18,200 - 18,500 level depending on the timing and its whether an entry around 15,500 is worth it, to hold for an undefined period of time to target c. 18,500, about a 20% return without leverage. I haven’t decided yet whether the HSI warrants a capital allocation or not, but this is my short form research none the less.
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NB - Of course none of this is financial advice and it is total conjecture. Please apply the correct risk management strategy for you and your portfolio.
I actually love Year of the Dragon lol. Def some cheesy stuff every once in a while, but that ending goes so hard- haven't seen a faceoff like that since really..