HKHSI and NASDAQ Downturn (5/5/2000)

Major Correction in the Horizon (4/15/2000)

Prof. Kai Keung Mark is a retired professor, Dept. of Biology, The Chinese University of Hong Kong and Dept. Head and Principal Lecturer, Dept. of Science, Hong Kong Institute of Education. He has three biotechnology patents. He uses his understanding of high technology to forecast market movements . He has published 13 articles in Financial Trend, and leading Hong Kong stock analysis journal plus many other Mark's letters since 1987. His prediction reliability rate reached 80%. He accurately predicted the October crash (10/18/87), the bottom level of 1990(3/5/90), the peak level of 1994 (5/11/92), the peak level of 1997 (2/12/96), the peak level of 2,000 (8/22/99), the peak in March 2000 (2/20/2000), the bottom in September, 2001, the US bottom in 2003 (5/28/2003), the HK bottom in 2003 (6/13/2003), the US peak in 2007 (11/14/2007), and the HK peak in 2007 (1/9/2008).

The Bear is coming

The author's last article (gold bubble to burst in 2006, Dec.18, 2005) forecasts that gold price will rise with accelerating slopes which was demonstrated to be true. Thus, gold price hit 730.00/Oz in May, 2006. He also forecast that such speculative bubble will burst within 2006. The gold price did drop from 730/Oz to 543/Oz recently. Given the price movement in the past few months, the peak range can be estimated to be around 730-800, but not 1,000/Oz as many others have proposed. The author feel that gold charts frequently form double head formation, and if it happen, the second head will fall within this range.

The stock markets of the world have drop extensively with US leading the turn. The US stock market turn was induced by interest rise worries, but spark off the burst of the stock market bubble among the emerging markets. Such bubble bursting of stock markets with drops over 20%, sending tremor around the globe, resulting a world wide drop in most stock markets.

The most important question most investor want to know is whether such big market drop would trigger the premature arrival of the bear market. The author analyze the data, and describe his impression of the situation and ways to handle the situation.

The author feels that the US stock market is in its late bull phase, so although a bit premature, the turn to bear market is possible. The evidence for US stock market to be in its late bull phase are as follows:

1. There has been 17 interest rate rises each of 0.25% including the last one of June 29,2006. This is a long and extensive interest rate hike when compare with the previous business cycles. High interest rate is a standard feature of late bull phase in business cycles.
2. Unemployment rate is going down steadily although not reaching full employment yet. Low unemployment rate is also a feature of late bull phase.
3. Commodity price has risen extensively in the past one year. Because booming economy and production, the demand for raw materials tightens. This is a typical feature of late bull phase which usually extend into the bear phase.
4. Inflation signals start to beep. This force the FED to increase interest rate to dampen inflation at the expense of economic growth which might induce bear market. Inflation is a lagging indicator, and is a good signal for bear market.
5. During the regular interest rate rises like the first 15 rate hike, each rise have small impact on the stock market, but the recent response to interest hike is very violent, but this is also a late bull phase features.

The following points are hints that might imply that the Bear is coming.

1. The major world stock markets have extensive drops that go beyond the bull-bear indication boundary. This bull-bear indication boundary can be the 250 days moving average or the fan line III by the author. Because of the wide coverage of this feature, some significance must be assign to it.
2. The DJIA had form a head and shoulder formation, and drop below the neck line. The standard calculation of this formation suggest that the drop can go below 10,600 points. (see Fig. 1) Head and shoulder formation is a common major turn feature. However, DJIA did rise above the neck line which significantly reduce its significance, but nevertheless still a serious warning. DJIA later develop into a double bottom after three down moves. If DJIA cannot rise clearly above the last high of 11,700 points within three months, then arrival of the bear should be confirmed.
   
   
3. The NASDAQ chart forms a large and a small rising wedge. The small wedge drop through lower support line (see Fig. 2)giving the earliest hint that a big correction is coming. This drop is fast and extensive, and later change into a down move channel with three down moves. During this down swing, it also penetrates the large wedge formation which has bigger significance. A more careful examination of the top formation between March till June,2006, one found a left shoulder, a head in the form of a double tops, and the right shoulder and the neck line. The neck line is penetrated followed by extensive drops in three waves.Even worse is that the right shoulder is served as the hinge of three fan lines. ( see fig. 2) This is a very typical pattern of the first phase of bear down turn. From the author's point of view, NASDAQ demonstrated the strongest bear signal. Because such pattern is so typical, such signal should be taken seriously.
   
   
4. Hong Kong's HSI does not give any significant turn formation. It only breaks the rising channel one expects after an extensive rise. However, the drop is extensive, and forms a down wedge. This down wedge is broken up side, meaning that the extensive drop has halted. (see fig. 3) The rise can become the second head of a double head turn formation everyone is waiting for. (The first head is the peak reaching 17,328 pts.)
   
   

The author recommends investors to prepare for the changing outlook, accept the possibility that the bear is likely to come, and take proper action to deal with this situation. Luckily, the market seem to believe that this long cycle of US interest rate hike is close to an end or at least the pace between each hike will be longer, therefore the stock markets of the world may have a rally, and investors can sell or at least reduce their holdings under such uncertain outlook.

Base on reasons outlined above especially point 1) and 3), the author anticipated that the bear is coming. This implies that the next high of the DJIA or NASDAQ may not reach the last top or at most reaching roughly the same height as the last top with the formation of double top. If the US stock market does rise significantly above its last high, then the author's forecast is wrong. Please note that this bear call is the first among stock market forecasters. The author take the risk to say so before confirmation is at hand because it is important for investors to be warned when a market rise is coming, and to retain good gains when it is still available.