We have been rather prescient with our calls on this index and , and by extension, the Shanghai index as well.  So a review of the EW reading for this index might just be appropriate.

Our big picture take on this is that the index made a B-wave high last year and is now falling in wave C which should take the index down by about 2/3d’s, to the 4th wave of previous degree or even the 4th of 3 of previous degree, and, as is often the case, to a level that corresponds with C being equal to A in the “flat” A-B-C.  All of those things are somewhere between 1000 and 800 on the index, all three of them, so they form a nice cluster. Moreover we already seem to have broken through the lower boundary of the 40 to 50 plus channel that has contained this index for most of it’s existence, the only clear exception being the 2008 peak. A swing to the other side now would not be an unreasonable expectation if you think of the pendulum overshooting the lower boundary by a similar amount, more or less.

In short we remain as bearish as before even if we are not entirely sure of the short-term EW position of this index, that is is it wave 2 of 3? or are we still in wave 2 of the 5 wave sequence that wave C should follow? In any event, I doubt that the index will be able to re-enter the channel, roughly at about 22500. Before that 21000 if exceeded, would cause a number of overlaps that are highly unlikely.

We start with the usual, then March 20, 2015 (there are earlier blogs!) and now charts;

We got the peak right within ten days, but not the height as the throw-over certainly did exceed our expectations. This, of course, is your standard wedge, pennant or diagonal. It is a classic pattern and is highly reliable in predicting what lies ahead, which is down to the base, 16000, as a minimum. Why should we here in Canada care? Well for one thing Vancouver is now North America’s costliest city according to a Bloomberg article, at 2.3 mln. C$ for your average detached home, a double since 2005! Partly this is due to the fact that this port city is surrounded by mountains and consequently the usual sprawling expansion in all directions is not available. More importantly it is the Chinese connection which goes back to the days of the railways. Much of the real estate is bought with offshore funds and much of that is from HK.

Vancouver proper with a population of about 600,000 is Canada’s 8th largest municipality, Toronto weighs in at about 2.6 mln. so at least 4x as big. Furthermore the climate is more agreeable and there is an abundance of nature in the area.  So just imagine what happens when a few million people from China or Hong Kong decide to buy a pied a terre in this paradise for themselves or for their kids. There are 265,000 international students in Canada, 80,000 from China. The impact is bound to overwhelm the locals.

With stock indexes imploding, the Can.$ perhaps bottoming things may change in the near future. But first there is the J-curve effect which basically means that things initially go in the opposite direction of what one would expect because investors are trying to get in under the wire before things get seriously worse. For the Hang Sang index we expect a further drop to about 16,000 and ultimately perhaps to 8000;

Stockcharts does not input data from overseas markets in real time; it is done the next day and as a result the charts are only available the next day. Today the markets are closed in HK and the charts below are of April the 8th.

The wedge is complete. There is a pretty big throw-over which, given the second gap beneath it, suggests we may get an island reversal – that is once you are on the island you will not be able to get off without a loss which forces you to stay longer than is advisable. Time will tell.

PS We are up another 700 points after almost hitting 28000 which is worrisome for our outlook.

Hong Kong’s HSI index was up 3.8% or 961 points all in one day. The high of the day was at 26,247.63, well above the rough target I had yesterday of about 25,800. The difference, as mentioned , may be accounted for by a slight throw-over, a normal event with these wedges.

It should now be assumed that this index has peaked!

For good measure we throw in a chart of the Shanghai index. This one is up a miraculous 100% or so in just one year, at a time when the economy is stalling a little.

This one may or may not be completely done but it certainly does not contradict our call on HK. Interest rates in China are still at 5.3% by the way.

Also for the benefit of the reader we have included (below) the chart of the CAC 40 where we encountered this same diagonal or wedge pattern, see June 6, 2014 blog on the left. We did not know how big it was but certainly the one shown in blue was perfect in all respects. This made the call to at least the base rather easy. It promptly did that and more. Than it shot up which we did not anticipate but that is a different matter all together. These patterns are extremely reliable and are ignored only at your peril. You can click on this chart and the one in the previous blog and make an easy comparison. Despite the fact that one is 1/2 year long and the other 3 and 1/2 years, the patterns are pretty much identical.