Where does the Hang Seng go from here?

The Hang Seng (HSI) had a terrific run up of about 25% from June of last year through January of this year, peaking at 23,822.  Since that time the index has tried to break through that high a few times to no avail, falling short in May, September and most recently again on October 20^th.

The index was down 2% last week, and some investors are asking if we’re set for a pull back to the tune of the 15% drop we saw after the May high, or is the Hang Seng set to reverse course and break through 24000?

We provide a compelling projection by studying past investor behavior in two ways:  1)  Looking at the Hang Seng from its May 20^th high to see when this trading pattern has occurred in the past and how investors have reacted over the next month and 2) Taking the last one year price pattern of the S&P 500 to see what the Hang Seng has typically done in the next 1 month.  Both provide a compelling case that the Hang Seng is set to go higher.

First, we found four highly correlated, historical instances of the below price pattern in the Hang Seng:  starting in June of 1984, November of 1992, September of 2005 and May of 2006.

Hang Seng (HSI) since May 20th

In all four historical instances, the Hang Seng was up an average of 6.38% in the next one month

Next, due to the strong correlation to the U.S. market and economy, we looked at the last one year of the S&P 500 to see when we have seen this pattern in the past and to see what the Hang Seng did in the next one month.  We found 26 highly correlated instances of the last one year price pattern in the S&P 500.

Last one year price pattern of the S&P 500

The Hang Seng is up in 20 of the 26 historical instances of the last one year pattern in the S&P 500 (3% on average)