Hang Seng, China A50 futures clinging by a thread before third plenum

• China’s key third plenum will be held next week
• Measures to reboot economic activity will be in focus
• Chinese stocks continue to slide after a hot start to the year
• China A50, Hang Seng futures have broken or threatening to break key levels

Now or never

If the Politburo wants to get Chinese markets excited about what may come out of next week’s third plenum, it better get cracking. Because with economic activity coming off the boil and with no major stimulus measures in sight, not only are stocks indices rolling over but breaking or threatening to break key levels on the charts.

Before we get to said charts, this excellent primer from Bloomberg explains what the Third Plenum is and why it’s important for the longer-term trajectory for Chinese markets.

The conundrum for China bulls

While technology headlines will feature heavily, from a broader perspective, there’s likely to be plenty of interest in the government’s plans to address the property market downturn that has slowed the recovery coming out of the pandemic, creating headwinds for consumption given it's the largest source of wealth for most households. With prices going backwards in many parts of the country, the largest part of the economy has been sluggish, leaving the industrial sectors to do much of the heavy lifting.

A reboot is badly needed, as seen in the inability for Chinese stocks to maintain the bullish momentum seen earlier this year. With the economy spluttering, so too are earnings expectations. With the added threat of geopolitical tensions and sudden policy changes, is it any wonder why investors are rushing to buy government bonds at the expense of stocks? They can see activity rolling over, creating a disinflationary environment which is great for bonds but not heavily indebted households or firms.

Not even evidence that China’s ‘National Team’ has been active trying to halt the stock slide has had success to this point. And when you look at where China A50 and Hang Seng futures sit on the charts, you get the feeling that if concerns mentioned above are not addressed, the slide could easily turn into a rout.

China A50 teetering after breaking 200DMA

China A50 futures have been sitting in a descending channel since late may May, seeing it break the 50-day moving average in June before doing the same with the 200-day equivalent earlier this month. The break of the latter looms as important, leaving only a support layer between 11839 and 11770 standing in the way of a potential deeper flush towards 11556 or lower.

With no sign of a pickup in volumes to signal a potential market turnaround, it’s hard to get excited about the prospects for an imminent turnaround. Aside from divergence between RSI and price, it the A50 doesn’t have much going for it right now.

Should we see a break and close below 11770, it offers a decent short setup, especially if accompanied by a back-test and bounce off the level. A stop could be placed above 11770 for protection, allowing for a test of lower levels. 11556 is one target given it acted as support and resistance late last year. Despite not being respected earlier in the year, it’s still likely to be on the radar of other traders. Below, 11380 and 11110 are other targets to consider.

Alternatively, should futures hold 11770, the trade could be flipped with a stop below the level targeting upside. Realistically, given the prevailing trend, you’d like to see the price break and close above the 50-day moving average before considering any bold bullish bets. 11977, 12130 and 12296 are potential trade targets, the latter requiring the price to break out of the downtrend running since May.

Hang Seng downtrend stalls before 17200

Hang Seng futures are in a similar position to A50 contracts, grinding lower within a descending channel. While the signals from RSI and MACD remain bearish, with no pickup in trading volumes to suggest an imminent or sustainable turnaround, the price action over the past fortnight has been a little more constructive than Chinese large caps, continuing to attract dip buyers below 17512.

While there are setups available using 17512, the most interesting feature on the chart is 17200, a major level not only consisting of horizontal support but also the 200-day moving average. For mine, that looms as a far better level to build trades around. If we see some downside in the near-term, it will be instructive to see how the price action interacts with this level. Either side of 17200, support is found at 16060 with resistance above 17512 found at 18125.

-- Written by David Scutt

Follow David on Twitter @scutty