hang seng below 21050 resistance ahead of u k referendum 1817832016

Daily Outlook, Wed 23 June 2016

(Click to enlarge charts)

What happened earlier/yesterday

The Hong Kong 50 Index (proxy for the Hang Seng Index future) has continued to push up earlier this morning, 23 June in line with other risk assets that are still gaining in favour of an anticipated win for the “Remain” camp in the U.K.’s EU referendum that is opening to the polls in a few hours’ time.

In the event of Brexit, Hong Kong among the Asian economies is the most vulnerable given her relatively high exposure in trade, investment and capital mobility links with the U.K. Despite this apparent risk, the Hang Seng Index is pricing an “optimistic” outcome as it continued to rally and record a gain of 5% from last Thursday, 16 June low which outperformed Singapore, a similar peer in terms of economic links to U.K. and also dependant on capital flows. From the 16 June 2016 low, Singapore’s benchmark FTSE Straits Times Index recorded a rally of 2.5% to yesterday, 22 June high of 2815 (only half the gain of Hong Kong’s Hang Seng).

Technically speaking, the on-going rally seen in the Hang Send Index is now showing potential signs of exhaustion.

Key elements

Current price action is now below the 21050 medium-term pivotal resistance which is defined by a confluence of elements (the descending trendline in place since 26 October 2015 high and the 76.4% Fibonacci retracement of the recent decline from 07 June 2016 high to last Thursday, 16 June 2016 low) (click here to recap our latest weekly technical outlook/strategy published on Monday, 20 June).
Interestingly, right below the aforementioned 21050 pivotal resistance, the Index has shaped a bearish “Ascending Wedge” configuration which suggests a “slow-down” in upside momentum as the magnitude the “higher highs” is lesser than the magnitude of the higher lows” (see 1 hour chart).
The upper boundary of the impending “Ascending Wedge” also coincides with the 21050 pivotal resistance.
The 4 hour (short-term) Stochastic oscillator has already reached an extreme overbought level which suggests limited upside as upside momentum of price action is being “overstretched” at this juncture.
The short-term supports to watch will be at 20685 (lower boundary of the “Ascending Wedge”) follow by 20300 (the gapped up seen on Monday, 20 June and also the 61.8% Fibonacci retracement of the current rally from 16 June 2016 low to today’s current intraday high).

Key levels (1 to 3 days)

Pivot (key resistance): 21050

Supports: 20680 (trigger), 20300 & 19880

Next resistance: 21650

Conclusion

Potential short-term upside exhaustion. As long as the 21050 pivotal resistance is not surpassed and a break below 20680 (trigger level, lower boundary of the Ascending Wedge), the Index may see a decline to target the short-term support at 20300 and even the 16 June 2016 swing low area of 19880.

However, a clearance (daily close) above the 21050 pivotal resistance is likely to invalidate the preferred medium-term bearish view for a further push up to retest the 19/28 April 2016 swing high area of 21650.

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