Hang Seng, China A50: IMF gets bullish as just as Chinese stocks roll over

IMF upgrades its Chinese economic growth forecasts for this year and next
Fund is notorious for telling markets things they knew months ago
Hang Seng futures generating multiple bearish signals
China A50 futures at risk of breaking 2024 uptrend

It’s said the stock market isn’t the economy and based on the performance of Hang Seng futures on Wednesday, it’s hard to argue against. Because on the same day the International Monetary Fund upgraded its China economic growth forecast, stocks in Hong Kong are getting hammered.

IMF bullish on Chinese economic growth

The IMF revised up its 2024 and 2025 GDP forecasts by 0.4 percentage points to 5.0% and 4.5% respectively. However, it warned growth is likely slow to 3.3% by 2029 citing headwinds from aging demographics and weaker productivity growth. Gita Gopinath, the funds First Deputy Managing Director, said the upgrade was due to stronger-than-expected growth in the first quarter of the year, rising 5.3% from a year earlier.

Despite the optimistic assessment, the fund said risks remained to the downside, specifically mentioning the property market correction which Gopinath said “must continue” to put the economy on a more sustainable footing for the longer-term.

Just as Chinese stocks start rolling over

Rather than early and accurate in predicting shifts in the global economy, the IMF is a laggard when it comes to forecasts, often providing views that markets priced in months ago. It’s not unfair to describe the fund as something of a contrarian indicator, a view bolstered by the reaction of stocks listed in Hong Kong which fell sharply in early trade on Wednesday, led by losses in tech, healthcare, financials of more than 1.7%.

Hang Seng generating bearish signals

Looking at futures, the tombstone doji candle printed on Tuesday warned of growing downside risks. And in the absence of a decent bounce into the close, the three-candle pattern to start the week resembles an evening star, another indicator of a near-term top.

For the moment, Hang Seng futures are finding support at 18500, a level that’s been tested on four separate occasions over the past month, including today. With potential downtrend resistance nearby, a break of 18500 opens the door to a deeper flush, potentially to 18150 or 18000. Below, 17500 is the next level to watch with more pronounced support found at 17200.

Should 18500 give way, consider selling the break with a stop loss order above for protection. Alternatively, should 18500 hold and futures push through the downtrend, consider buying with a stop below the level for protection. 18960 would be the initial trade target. Given RSI and MACD show momentum is building the downside, selling rallies and breaks is preferred to buying dips.

China A50 bears eye uptrend test

While the Hang Seng is looking worse for ware, stocks listed in the mainland are faring slightly better with China A50 futures managing to hold in positive territory. However, sitting in a minor downtrend and bumping up against a longer-running uptrend, you get the sense that the next couple of days could be influential in determining its longer-run trajectory.

It comes with the caveat that candle is yet to be complete, but the long topside wick of Wednesday's daily candle, combined with building downside momentum in indicators such as MACD and RSI, suggests we may soon see a test of the downtrend dating back to early February. Should it go, 12530, 12422, 12400 and 12075 are the downside targets to watch. 12422 is the current location of the 50-day moving average, a level A50 futures have respected on multiple occasions over recent years. Combined with horizontal support at 12400, that’s an important zone for bears to watch.

If we see a clean break, consider selling with a stop loss above the former trendline for protection. On the flipside, if the uptrend holds, another trade idea would be to buy with a stop below the level for protection. As is the case with the Hang Seng, selling rallies or breaks is preferred to buying dips in the near-term.

-- Written by David Scutt

Follow David on Twitter @scutty

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