The Hong Kong 43 index is displaying unusual behaviour. Swings from high to low and back are getting larger in a broadening top, or megaphone, formation. Rallies over the last two days have pulled the market back from the brink, but it will remain on the radar until the index breaks one way or the other.
Fundamentally, there is a bull case for the HK market, depending on a trader's view of China. Better than expected Chinese data over the last fortnight (imports, exports, flash PMI) is pushing market sentiment back from bearish extremes. This is very important to the HK market. 56% of the value of the index is financial shares - banks, property, insurance - that are highly enmeshed with the mainland
Combined with a trailing HK index PE around 10 times, and a dividend yield near 3.5%, better China sentiment could mean upside for the HK 43.
A megaphone is a relatively rare chart formation. It points to an increasingly volatile wrestle between bulls and bears, and is usually seen as a trend reversal pattern. As the market rose into the megaphone, many traders will look for a break towards the downside. Although not a classic use of this formation, I'm inclined to trade a break to the upside only, as this would be in line with my fundamental view. This is an example of drilling into a deeper understanding of a chart formation - a break upwards still signals a victory for bulls over bears.
Stop entry orders on the CMC Next Generation platform don't expire. Placing the order now means I'll trade if the break occurs, regardless of what I'm doing at the time. Note the trailing stop loss - the literature is very divided on the ability of the megaphone to predict the size of a break: