The bear attacks HK suddenly
 

Stock analysis is still an art that defies logics and calculation, sometimes. I outperform Abby Joseph Cohen, one of the best US stock analysts, in the past five years. In my earlier article (Sept. 30, 2000), I blew the first whistle that the bear was coming for US and HK. In that article, I did say that "(this wave) would produce a major direction turn signal for DJIA." and "double-head formation" for HK. In my last article (Dec. 23, 2000), I also correctly pointed out that "…after reaching these return lines, it will initiate another cycle of down movements which are likely to make new lows in the coming weeks."  Now both DJIA and NASDAQ have made new lows as predicted. As for the bullish prediction of HSI, I was partially correct in that HSI did gain 1800 points to reach16,300 from the bottom of around 14,000. However, I did not perceive that both US and Japan markets would fall so suddenly and drastically at the same time, particularly upon a newly elected president. The rippling effect on HK and other markets is way off scale.

Back to forecasting, a third-phase technical bear market for HK market is now confirmed. HSI has produced a double peak at around 18,300, and two bottoms slightly below 14,000. One can draw a line along these two bottoms as the neckline (NL). Anyone with technical understanding can visualize the importance of this neckline.  On one hand, it will have strong support. But if broken downside, it may mean the double head formation is confirmed, and HSI may drop to 10,000 points through the standard calculation of the expected drop. The standard calculation of drop for double top is the distance from the top (18,000) to the neckline (14,000) is equal to the distance from the neckline to the bottom of the fall (expect to be 10,000 by this calculation).

On the positive side, HK has a very good economic outlook for 2001, indicated by lower interest rate, recovery of the property sector. China will have 7% growth for the next 5 years as outlined by premier Zhu Rongji, and China and Taiwan will joint WTO this year, which will bring in a lot of business activities to the region. Therefore, most stock analysis including myself do not believe that under such rosy situations the HK stock market would drop to 10,000 (HSI). As a result, I would expect that the NL support would hold, and the double head formation would not materialize by penetrating the neckline (NL). This is the reason behind my statement given in my last article (Dec. 23, 2000) that 14,000 would not be penetrated.

By early March this year, DJIA suddenly nose dived below its oscillation range between 10,900-10,300 for the past 5 months. At the same time, Japanese Nikkei index also suddenly turned sour for a 15-year low. With the contraction of wealth worldwide due to price reduction of the blue chip stocks owned by the banks and big corporations, the credit crunch produced a vicious cycles. These are forceful psychological pressure, and this induces fund managers to hold more cash. Such psychological cycles will take some time to complete its course.

From technical analysis, each bear run usually take three phases to complete, and most of the time it is illustrated by the three-fan rule. In HK, the initial crash appear on April, 2000 followed by a big rebound going back to 18,000 producing a double top. The second crash appeared on Sept., 2000, in line with the US initial crash.  Now it is the third wave down. In a normal bear run, this third phase is characterized by blue chips leading the down move. The index will move down more slowly then before, but in a more steady pace, producing a more perfect channel on the way. According to Eliot wave theory, the final wave, either up or down, usually is more extensive then the first two waves. Now the chart suggests that HSI may reach 10,000 under a very strong fundamental condition listed above which is hard to believe.

 

I would conclude that:

(1)   This round of HK down move is solely influenced by the weakness from US and Japan;

(2)   Stock markets never stop at the reasonable level. It swing between the two extremes of being too optimistic and too pessimistic;

(3)   These alternating bull runs and bear runs summarize the market behavior for the past 50 years or more. It is quite reliable and reproducible due to vicious cycles from psychological response and economic cycle.

(4)   Interest rate cuts takes 6-9 months to produce its effect. So hold your breath. Business cycles have to take its course. Cutting interest rate and falling market are typical third phase bear market behavior;

(5)   Be patient to wait for the market to turn around. With Alan Greenspan watching over the shoulder, things would not go too far off.