Chinese stocks have experienced a robust rebound following the conclusion of the Lunar New Year break. Recent reports indicate that policymakers have implemented additional measures to bolster buying activity. The A50 index in China is currently testing the downtrend that has persisted since 2021, while Hong Kong’s Hang Seng has managed to surpass resistance at 16400.
The recovery in China’s state-endorsed equity market continues to gain momentum, aided by a series of measures implemented by policymakers aimed at encouraging traders to buy. While some observers have criticized the rebound as manufactured or unsustainable, it is undeniably effective.
There are signs that foreign investors are beginning to re-enter the market, contributing to some mainland indices posting their longest winning streaks in over a year on either side of the Lunar New Year break.
However, significant challenges remain, including the need to break the persistent downtrend that Chinese stocks have experienced since early 2021. The current rally, which has seen a gain of over 12% since January lows, has brought the China A50 index close to breaking this long-standing bearish trend.
Although an initial attempt to break the trendline on Thursday was unsuccessful, the subsequent reversal was relatively minor, indicating that buyers and sellers may continue to engage in trading activity, particularly if China’s ‘National Team’ intervenes.
Given the proximity to the trendline, there are various potential trade setups depending on how price action unfolds. The prevailing bias suggests upward movement, prompting traders to monitor closely for a breakout not only of the downtrend but also the 200-day moving average located slightly above.
Key levels offer opportunities for two-way trading strategies
Personally, considering the historical market performance, heavily reliant on state-backed support, I prefer to wait for a decisive break and close above the 200-day moving average (DMA) before considering a long position. This approach allows for placing a stop-loss order below the 200DMA to guard against potential reversals.
On the upside, futures reached a peak around 12280 back in November, marking it as the initial target for upward movement. Further above, significant trading activity occurred around the 13060 level in the latter half of 2023, with the triple top formation at 13520 emerging as the subsequent level of interest.
Should there be a reversal in the upside momentum from these levels, it presents an opportunity to consider short positions, with a stop-loss placed above both the trendline and the 200DMA. The target would be a potential retest of the lows seen earlier this year, with particular attention to the 11375 level, closely followed by the 50DMA.
Regarding the Hang Seng index, it has also experienced a rebound, albeit at a slower pace compared to a surge, positioning it some distance away from retesting the downtrend since 2021. However, the breakthrough of resilient resistance at 16400 on Wednesday sets up an intriguing scenario for bullish traders.
The price action subsequent to the breakout didn’t exhibit significant conviction, with Hang Seng futures sharply reversing later in the session after initially reaching highs around 16800. Thursday’s early movements may offer insights into the index’s performance for the session.
If the 16400 level holds, it would provide an opportunity for traders to initiate long positions, with a stop-loss placed below, aiming for a move back to 16800 or even 17200, depending on the strength of the initial move. Given the presence of minor uptrend support and the proximity of the 50-day moving average to 16400, the setup for potential short positions isn’t compelling at these levels
