Long

HSI bearish trend might be overturned

Moving into the last month of Q2, the HSI has entered a very interesting zone, which might become a turning point that indicates the end of the current bearish trend. Whether the new trend will be a sustainable bull, or just a bigger consolidation band of a higher timeframe, we don’t know yet, but at least in the short term the trading opportunity will be on the long side.

Fundamental Update

Last week the Chinese premier Le Keqiang had hosted an internal economy forum to discuss policy to rescue Chinese from global recession as well as covid zero policy. This meeting is a very important indication that the party has finally started to actively (and publicly) unwind their conflicting policies on the issue of public health and economic stability. More than 100,000 participants from the central state council and local provincial government had joined, which showed the weight of this meeting.

One strong message from the meeting is that the central government would give more leeway for the provincial government to take their own action to secure their own economy. Given land sales is still the major source of income for most provinces, the tightening policy for real estate markets should see a reversal from this point onward. In fact, one should get the same message from the recent lowering of the five-year loan prime rate from 4.6% to 4.45%, which lowered the cost of borrowing for Chinese home buyers.
On May-17, the Chinese vice-premier Liu He had shared his comments on the Chinese government support toward platform economy and overseas listing of Chinese tech firms. Coming from Liu He, that was a strong indication that there is a rising popularity in the party in prioritizing economic growth versus other internal conflicts. While this might be the turning point of the 2 years long tech crackdown, we shall continue to monitor how the story continues to unfold on the government side, as well as on the tech company side if these 2 years have caused some irreversible damage to their fundamentals hence futures.

Chart Perspective

The downward trending 50 days moving average has been the ceiling of the current bearish trend since 2021-Jul
The market had tested the bottom from May-5 to May-12, but failed to reach the Mar-15 low at 18235
If the current rebound successfully break the 50 days moving average, there will be increasing chance that this bearish rebound might turn into the beginning of a consolidation band, or even bullish trend
Key levels to watch are 20850 (50 days moving average) to 20927 (May open). Note that if the index can close above 20927, it will form a reversal candlestick pattern in the monthly chart (i.e. hammer/dragonfly doji), which is very bullish.

Trading Opportunity

The breakout trade
Long HSI futures (or bullish HSI CBBC product) when index rises through 20800 level. Recommend to adopt a trailing stop strategy for profit taking. Breakout trade should be exit if index traded back under 20800
The bullish trend following trade
As of today, the index is still trading under the 50 days moving average, meaning the bearish trend is still effective. Any higher than intra day time frame bullish trade should be considered as front running. I am not encouraging or discouraging front running, as long as one understands the frontrunner is gaining the cost benefit by taking the trade at a lower winning probability pricing or timing. To take this frontrunner trade, I recommend buying at the money or <10% out of the money June or July HSI call option (or equivalent derivative warrants product). Compared to holding an outright long future position, I prefer to make use of the exponential payout curve nature to reduce my P&L volatility when waiting, as well as increasing my delta exposure when the trend is in my favor. Option position for this longer term setup should be rollover 2 weeks before expiration to avoid theta causing material harm to your P&L. This frontrunner trade should be close if the index go below 19200-18200 (it’s a range not a level, feel free to adjust within according to your level of conviction)

geoffreyip523

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