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).

International bear moves

The author's recent article "Bear signs strong and clear", (Nov. 14, 2007) provided the earliest warning, and demonstrated to be correct. The bear development proceeded as forecast, and even more interestingly, these markets can be arranged in an established packing order. NKY lead the pack, followed by CAC. DJIA and NASDAQ is 3rd and 4th. UKX is 5th, HSI and DAX are 6th and 7th. It is interesting to note that all seven markets listed above show the different stages of turn from bull to bear. The leader, NKY, already demonstrated a clear bear phase, while the lagging ones such as HSI and DAX are starting to show the features of bear arrival. From this series, one can perceive the vital features all investors need to recognize the gradual changes in chart patterns during the switch from bull to bear. Therefore, the author feels that this is a good opportunity to illustrate the features of bull turn bear chart patterns as well as other important correlation features. Investors can learn a lot from this exercise.

Before going into the chart patterns of each market, the author want to present the big picture and major developments internationally, so that one can understand what the charts are reflecting. One should accept the historical fact that the US stock markets (DJIA and NASDAQ) are the world's most important markets. They usually lead other world markets in the past. The US led the world in interest rate cuts after 9-11 reaching historical low of 1%. This induces a strong bull in the US housing market. An extensive rise usually followed by extensive fall because economy usually behaves like a pendulum. On top of the bear housing market starting from mid 2005, another new and significant financial crisis developed. This is the sub-prime bonds. This is a very sophisticated design that it is hard to understand what is in the package, but it is also a very profitable design with big amplification of its asset values. Because the system is so profitable, the bond issuers want more borrowing thus encourage extensive borrowing from the sub-prime group. One important rule in finance is that when one amplifies the asset, one makes greater gain on the way up, but it also leads to greater lost on the way down. The bear swing of the US housing market induce increasing rate of default on subscription of mortgage which triggered a panic selling of the sub-prime bonds. Due to the ingenious packaging and high interest rate, such sub-prime bonds are very popular to banks internationally, so such panic created a chain reaction internationally. On top of the big financial lost, it also created a credit crunch (the sub-prime crises). Despite of rising inflation, the US FED had to cut interest extensively, a clear sign that the US economy is in big trouble. With this background, we now turn to individual stock market index. This time we use long charts that cover 2 ½ years because such long charts illustrate the bull turn bear features much clearer than the short charts commonly used.

1. NKY. We noted that the rate of rise leading to the left shoulder (SL1) (April, 2006) (see fig. 1) is steeper (fan line I), then the following waves contained between two rising fan lines (fan line II and III). NKY made 10 contacts with Fan line III over one year period, so fan line III demonstrated to be a very important support line. During this period, the chart formed the double heads at the same height, with the first head (H1, Feb., 2006) very sharp, while the second head (H2, July, 2007) consist of small double peaks, so the two major heads are separated far apart by five months. The world's first major bear signal appear when this well separated double heads are formed, and then drop through this important support line (fan line III). So the author wrote the first bear article (Market top warning, July 27, 2007). This first signal triggered an international market fall. All seven markets fall together, in the formation of three fan lines, or to say that the fall consist of three waves, but different markets fall at different extent. NKY fall more extensively. Then the author read the chart language which said that the fall will end, and normally will follow with a rebound. The author reported honestly without reservation what he had observed (market rebound is coming, August 14, 2007), and also described the beauty of fan lines (magic of fan lines, Sept. 2, 2007). The bear signal in NKY was confirmed when neck lines (NL1 and NL2) are penetrated, so the author wrote the 4th article (Sept.9, 2007). The author noticed that the rebound up move cannot reach the level of the double heads, and turn downward at a much lower level, and form the right shoulder (SR). This is the confirmation of the bear market. The NKY then drop extensively, penetrating two well established support lines, the NL2 and NL3. Such head and shoulder formation and the penetration of NL2 also imply that the market will drop equal distance from the heads to the NL2, and from the NL2 down reaching 13,000 points which was also fulfilled. One can also draw another important fan line I by linking H2 and SR. However, this fan line will not be reached for months to come, but it is a good reference for the progress of the bear run. With such a long chart of 2 1/2 year length, the bear pattern is very clear, and very classical. Such bear pattern is also very useful in assessing the reliability of bear developments in other markets.

2. CAC. The French market produced a very long upper return line that lasted over two years, and with 6 contact points (see fig. 2). The head consist of triple tops, and the NL1 was challenged twice by the low points between the triple tops from above, and the two tops of SR1 from below, thus this neckline ( NL1) is well defined. The extensive drop after the completion of the head (H) reach another neckline (NL2) which is another well established support line. Above NL2 are the left shoulder (SL), the head (H) , and the right shoulder (SR1).The bear sign is considered confirmed by penetrating NL1 (July 26, 2007), and it was further confirmed by penetrating NL2 (Jan.16, 2008). CAC drop further to reach NL3 very recently. One can also draw the important right side down fan line I from the head, touching the second top of SR1 and the SR2. This fan line will be useful later to gauge the progress of the bear run. From this head and shoulder formation, and the penetration of the NL2, the bear signal has been confirmed, and implied that the drop may go below 4350 points.

3. DJIA. The DJI produced a narrow up wedge (see fig. 3) with the upper return line lasting 1 1/2 years, and the lower support line also lasting 1 1/3 years. The tops look like a double heads, but the second head is slightly higher than the first, so it can also be taken as a short up wedge. The fall from the first head is not extensive while the same fall in NKY is quite extensive. The fall from the second head is more extensive, penetrating the short up wedge lower support line, and the long wedge lower support line. These penetrations hinted that the bear is around. The neckline (NL1) can be drawn from the left shoulder (SL) touching it from below, the correction low point between the two heads from above, and the correction low points from H2 and SR from above. However, this neck line (NL1) has just been clearly penetrated (Jan. 3rd, 2008), thus a bear confirmation can be given. From this double head formation, it also implies that the drop may reach 11,500 points. Actually, the bear is not just a forecast from these chart patterns, but is now already arrived US. One can also draw another major fan line (fan I )between H2 and SR, but this fan line will not be penetrated for some time, so It can be used to mark the beginning of bear phase II.

4. NASDAQ. Between June 2006 and Dec.2007 (1 1/2 yrs), this index is oscillating between two slightly diverging fan lines I and II (see fig. 4). The index hit fan line I 6 times from below, and also hit fan lines II from above 5 times. Within these oscillations, consist the left shoulder (SL), the two heads (H1 and H2), and the right shoulders (SR1 and SR2). The neck line I (NL1) is defined by the SL from below, the correction of the two heads from above, and the right shoulders (SR1 and SR2) from below, so it is a perfect neck line, and this neck line was penetrated (Oct.5, 2007). Neck line II (NL2) is defined by three contacts from below from the small oscillations on the far left, then this neck line II has withstand the dramatic fall from the left shoulder (SL) and the second right shoulder (SR2). This NL2 was penetrated (Jan. 15, 2008) Therefore it is another important bear confirmation, and also implies that the drop may go below 2,200 points.
From this long chart, one can also connect the second head (H2) and the second right shoulder (SR2) to produce the major right side down fan line I. As said before, it will take some time before this fan line is broken up side, so it can be used to mark the development of the next stage of the bear (bear II).

5. UKX. Between June 2006 and June 2007, UKX is oscillation between two slightly diverging fan lines I and II. (see fig. 5). There are 11 contact points with fan line I from below, and 7 contact points with fan line II from above. Each of the double heads consists of smaller tops (H'1 and H'2). The second top (H2) form a significant correction between the two minor tops (H'1 and H'2), thus a neck line (NL1) can be drawn, and this NL1 was penetrated. The more formal neck line (NL2) is well defined by two low points of the left shoulder peak (SL) from above, and also with three minor tops from below on the far left. The major challenge come from the extensive fall between the first and the second head (H1 and H2) from above. This important neck line was penetrated (Jan. 16, 2008). Because the two major heads (H1 and H2) are 700 points above NL2, and now that NL2 was penetrated, the drop should be over 700 points reaching 5300 points base on the historical calculation of head and shoulder formation, however the recent drop was already quite close to this mark. One impressive feature of the UKX chart pattern is the symmetry features. The two major heads are symmetrical, and the slopes from both the major head on both sides are also symmetrical. One can also draw an important right side major down fan line by linking the second head (H2) with the right shoulder (SR).This fan line will be useful in gauging the stage of development of the bear. The UK market is lagging behind US markets is reasonable because more fundamental factors like interest rate cut is also lagging behind US.

6. HSI. Hong Kong produced a long and narrow up channel from Oct. 2005 till August, 2007, a span of 23 months (see fig. 6). HSI hit the upper return line 6 time from below, and also hit the lower support line 4 times. HSI then rise drastically upward in a even narrower and steeper up channel with 4 contact points with the upper return line, and 3 contact points with the lower support line. The first bear sign is the breaking of this up channel. After breaking this steep up-channel, HSI form a triangle with peaks one lower than the last. This again is a bear signal especially consistent with the bear move of the major international markets. The most clear bear signal is the break from the triangle down side (Jan.11, 2008), followed by a rapid and extensive drop.

7. DAX. The German stock market is clearly still stronger than other markets until very recently. From June 2005 till June 2007 (2 yrs), DAX is in a rising mode with three clear waves 1, 2, and 3 (see fig. 7). From the Elliott wave model, the third wave is most drastic, but also turns after the third wave of rise. One also noted a long support from May 2006 till October 2007. The bear sign of DAX come from three aspects. The first is the penetrating of this long support line. The second is the formation of the triple heads, and each head again consist of double tops. This implies that there is very strong selling pressure at the top level. The third and the vital aspect is the penetration of NL1, so the clear bear signal can only be obtained very recently (Jan. 21, 2008). Because of this lag, DAX is placed last of the pack. Comparing the chart patterns of seven major markets under the same international economic environment, different markets produce unique patterns, yet they are all synchronized by certain bullish or bearish developments. The author is amazed that these markets produce consistent response such that in a year's development, some become leaders and some become laggards. Such packing order seem to repeat itself cycle after cycle. For example, HSI lag behind US was demonstrated during the bull turn of 2003, as well as the bear turn of 2007. US bull turn signal appear by April, 2003 (April 22, 2003; May 28, 2003), while Hong Kong's bull turn signal appear two months later (June 13,2003). Now US markets demonstrated rather clear bearish signal by Nov. 2007, while HK may have the needed bearish signal only by Jan. 2008, again a two months lag.

In understanding the recent bull turn bear switch, the author also faces many puzzles.

Puzzle No.1. The core of this bear run is due to the US housing slum coupled with the sub-prime bond crises. But this is the US problem, but why NKY and CAC lead the bear move.

Puzzle No.2 is about the implication of interest rate cuts. The conventional economic understanding is that during economic slow down, or bear market, the FED will cut interest rate. So cutting interest rate is obviously a major or key bearish inidcator of the economy. However, in the recent interest rate cuts, the immediate response is bullish. Stock market forecasters also treat interest rate cut as bull news, and expect the stock to go up with it. Majority of the investors also believe in such argument, resulting in a short rise of the index followed by long and sharp declines. From the behavior of past business cycles, once the bull turns bear, it will take considerable time to turn around no matter how strong the medication that the FED is using.

Puzzle No. 3 is about the advice from the investment advisors or forecasters. The author had made the first bear warning by July (July 27, 2007), followed by firmer and firmer statements as the author perceived progressively more solid bear evidence. By now the bear has arrived in US as president Bush is organizing a US$150 billion package to save the economy plus drastic pre-scheduled interest rate cut, but all the investment advisors are still recommending investors to buy. The author, by mid Jan. 2008, still had not heard any one from news paper or TV to recommend selling or at least reduce loading. This is a serious problem of the financial world, and the small investors are very vulnerable.

Puzzle No. 4. "From the fundamental economic indicators, US economy should be considered in the late bull phase or in a transitional state between bull and bear phase" (March 13, 2007). The US stock markets ignored all bad news such as housing price decline, and GDP decline during the second half of 2007. So in this round, stock index is not a leading indicator as it used to be, however, the foreign exchange group, on the other hand, give very early indication that the US economy is turning from bull to bear as illustrated by the drastic drop of US dollar. Why the international stock market group do so poorly compare with the foreign exchange group.

Puzzle No.5 is that there are several big international financial houses with teams of very smart people and with extremely high pay. They are aiming at helping the wealthy people to get richer, but to the surprise of the author, they did not publicly acknowledge that the bear is coming, and still make bullish recommendations publicly. The author obviously is very happy to get the impression that an amateur forecaster with a scientific background can recognize the bear a lot earlier than these big financial houses. So big companies not always perform best!