Where is the Bottom?

October 19, 2000

The extensive drop now experienced both in Hong Kong (HSI) and in US (DJIA) was in the forecast of my last column (mark 8) on September 30, 2000. Although the events that induce these drops seem to appear randomly, but somehow they appear at the very crucial moments, implying that there is an invisible hand behind all these movements ( that is how I explain them and not that I am extremely lucky every time).       

It  is time to speculate where is  the end of this down move, an exciting game for a technical chart analyst. The HSI is now in the second phase of the down movement forming fan line II (Fan line I is from 17,800 to 14,500) (see chart). It is anticipated that the second down wave will reach lower level than the first down wave. However, there is the neck-line of the two heads around 13,600 (see mark 8). Therefore, from the technical data of HSI alone,  one can speculate that the next bottom in October should be around 13,700 +/- 300 points. After such drop, a rapid pull back about 1/2 to 1/3 of the drop to break the fan line II upside (If the drop reached 13,800, then the pull back would reach 14,633-15,050). There should be a third down wave that normally are quite extended, and is governed by the fan line III.  Most people would not believe that stock price follow patterns that one can make prediction so precisely, but this is the most interesting part of chart analysis.     

We all know that HK stock market is not isolated. It is common sense that it is heavily influenced by the US market, especially when this round of down movement is induced by high oil price and the US market. The DJIA's  long channel since 1997 was broken down side in early October was predicted in my previous analysis. This break implies that a significant correction or even a bear market for US stock market will follow in the next half year. The DJIA should drop to 9.000 or below. Under such a shadow, HK stock market will shiver for some time (mid term) and the expected boom has to be delayed. Depending on the extend of drop in the US market, the third down movement (governed by fan line III) will adjust it accordingly. The fan line rule predicted that when the third fan line (fan line III) is broken upside, the bull or rising market will return. As fan line II will be completed within two weeks, the whole down move will be complete in about half a year. Therefore, 2001 will be more bullish for HSI.