After Hectic Summer, Hurdles Ahead for Hang Seng Index

There was a major mid-week relief rally for Hong Kong-listed stocks, after Chief Executive Carrie Lam on Wednesday said the government would formally withdraw a controversial extradition bill that had triggered months of disruptive protests in the region. The benchmark Hang Seng Index (HSI) rallied 3.9% on the session in anticipation of Lam's press conference -- representing its biggest daily gain since Nov. 2, 2018.

The bill's official withdrawal was greeted by markets as the removal of a major source of overhang for Hong Kong stocks, but Fitch followed up the news on Friday by downgrading the jurisdiction's credit rating, with a negative outlook -- suggesting further downward revisions are possible. The ratings agency warned that a "degree of public discontent is likely to persist" despite the extradition concession (as of this writing, demonstrations are set to continue over the weekend as additional demands from protestors go unanswered).

In addition to those lingering fundamental uncertainties, the Hang Seng enters a new week presented with some stiff challenges on the charts. Last Friday's intraday high was set just shy of the round 26,800 mark -- not only a psychologically significant century level, but the current site of HSI's descending 40-day moving average, as well. This short-term trendline has been a key player in terms of both support and resistance in 2019, and now lies just 0.4% north of HSI's weekly close -- which, by the time the dust settled, occurred at 26,690.76, just a chip-shot below another century level at 26,700.

This isn't the first time in recent history the 26,700 level has come into play. In early June, this big round number stepped up to contain HSI's rapid-fire retreat from its early April highs, and the index bounced sharply in the immediate days and weeks that followed. And like the 26,800 century level discussed above, 26,700 has dual significance; this area is also home to a 61.8% Fibonacci retracement of the Hang Seng's advance from its Oct. 30, 2018 closing low to its April 9, 2019 closing high (achieved just before the Beijing-friendly extradition legislation triggered a march on parliament).

The 27,000 millennium mark, for its part, was surrendered with a thud on Aug. 2, as global stocks sold off sharply on fresh U.S.-China tariff threats, and as civil servants joined public demonstrations against the extradition bill for the first time. This mega-round number marked a couple of HSI gaps with near-surgical precision in early December 2018, but its significance has been somewhat muted in 2019, relative to the aforementioned century levels -- despite coinciding with a 10% return from the index's October closing low.

Finally, as HSI looks to take on these looming hurdles, it's worth pointing out that a seismic shift may be starting to take place for the iShares MSCI Hong Kong ETF (NYSEARCA:EWH), in terms of fund flows. From April 1 to Aug. 19, the regional exchange-traded fund (ETF) didn't garner a single day of net inflows, per etf.com, with net outflows over the period totaling roughly $1.59 billion -- a figure that becomes all the more staggering when compared to EWH's current assets under management (AUM) of $1.40 billion.

But in the just under three weeks since, EWH hasn't recorded a single day of net outflows, with net inflows over the period amounting to $110.76 million. If this trend continues, Hong Kong stocks could find the fuel needed to help mount a serious challenge to potential overhead resistance, even as political and trade uncertainties remain.

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, September 8.