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), and the bottom in September, 2001.

Conflicting signals from fundamental and technical analysis

September 30, 2000

The current down fall in HSI have changed the general market outlook, and we need another overall review. The current down turn is triggered by the sudden surge of oil price in the world market. On the fundamental side, higher oil price would lead to higher inflation which would lead to higher interest rate. A higher interest rate may at some point trigger the down fall of stock price. Now let us re-examine both the DJIA and HSI from the fundamental and technical perspective.

Fundamental still strong

The fundamental outlook of DJIA can be summarized by the statement from Abby Joseph Cohen, the chief investment strategist from Goldman Sachs, who focuses on fundamental and enjoys a world wide reputation. She predicts that the US market will continue to grow at a reasonable pace, and the oil issue would not cast serious effect on stock price in general. On the Hong Kong side, my article mark7 has made a review and nothing has changed. Hong Kong economy is base on export, service industry, and estate. None is seriously or directly affected by high oil prices. If high oil price reduces the economy of the western world, it then reduces the export level of Hong Kong, and affects HK's economy indirectly. Even if this is true, it will take some time down the road to materialize. As a result, the fundamental outlooks for both US and HK are good, and this would imply that the mid-term and long term outlooks of their stock markets are good.

Technical analysis show weakness

However, if we look at the technical outlook for these two markets, the implications obtained are very different from that obtained from the fundamental analysis. Let us look at the US market first. From the DJIA chart between 1997-2000 (see chart I), one see an upward trend defined by two parallel lines usually called trend channel. During 1999 to 2000, DJIA formed a diamond shape still fitting the up channel. One would expect that after over one year's rest, the market should recover its upward momentum when it breaks the diamond formation upside, but the high oil price induces DJIA to go down sharply penetrating the very important support line of the channel in intraday movement.

Although President Clinton ordered the use of oil reserves, it can at best check the rise of oil price temporarily. The primary cause is due to world economic boom which can only be controlled by higher interest rate. If higher interest rate is imposed in the near future, DJIA cannot sustain the slow rise requirement imposed by the support line of the long channel, resulting in a downside break of this important channel in the near future, which would lead to significant drop due to the program traders. This in turn would produce a major direction turn signal for DJIA.

On the HK side, my mark1 and mark2 articles painted a rather bearish outlook which materialized partially with HSI dropping over 4,700 points, but the strong recovery of rising 4,400 points suggest that the market fundamental is likely to rule as most economist would believe, and thus the bear call is interpreted as a major correction. My mark5 and mark6 articles were written under such environment. I was more conservative than most analysis at the time by suggesting only to buy after correction below 17,000 when the market hovering above 17,000 for several months. Although oil price surge is a new element, it has triggered a sharp drop rather suddenly, implying some weakness in market sentiment. If the market is still in the middle of a bull run, such sharp and extensive drop should not happen because lot of money should be waiting to get in, and thus could cushion the drop in extent and speed. The long term technical pattern was reviewed again for alternative interpretation that can accommodate the recent behaviors.

Together with the 18,400 peak of March, the 4,400 points rise forming another peak around 18,000 on July can be considered as double head formation. Further to this, the extensive drop in September also slightly penetrated the fan line II drawn from the very low point of August, 1998, and the low point of 13,700 in May this year (see chart II), followed by a sharp 900 point rebound within two days. These behaviors are typical of early bear market. So if HSI comes back down below the fan line II after the sharp rebound, it will confirm that the bear market is coming.

In summary, the technical analysis points out rather bearish implication for both the US and HK in the recent developments, while the fundamental for both markets are strong. It is difficult to judge at this moment which force will dominate.