Hang Seng : Fading Momentum

(Mon, 7 Dec 2020). Asia-Pacific stocks look set to follow a strong US lead on Monday, although upward momentum appears to have faltered recently. A much lower-than-expected US nonfarm payrolls number reflected the deeper impact brought by the pandemic, and thus reignited hopes for more fiscal and monetary support. Some 245k nonfarm jobs were added last month, much lower than the baseline forecast of 469k. This also marks a fifth consecutive monthly slowdown in the pace of job market expansion. The unemployment rate fell to 6.7% from 6.9% in a month before, largely due to a 0.2% decline in the labor force participation rate.

Major western economies are on course to deploying coronavirus vaccines, with the UK giving the green light to the distribution of Pfizer’s version last week. US Health and Human Service Secretary Alex Azar said all Americans should be able to get vaccinated by mid next year and that the distribution could start as early as this week.

Vaccine hopes and weaker job market data sent three major US indices to their record highs on Friday. The next question may be where the US Dollar will lead stock markets to if the rollout of vaccines helps to revitalize growth and buoy inflation in the months to come. The US Dollar and the S&P 500 index exhibited high negative correlation over the past 12 months, with a correlation coefficient of -0.80. A severely oversold US Dollar flags risk for a technical rebound that may weigh on the stock markets’ rally. Read more in my USD-S&P 500 report here.

Asia-Pacific stocks have capitalized on recent tailwinds, but upward momentum appears to have faltered after scoring astonishing gains in November. Trading towards the year-end may be quieter due to seasonality and holiday reasons. The Nikkei 225 index registered a 10-year average monthly return of 0.93% in December, marking its fifth-worst-performing month. For Australia’s ASX 200 index and Hong Kong’s Hang Seng Index, the 10-year average returns in December are 1.31% and 0.46% respectively.

Sector-wise, 8 out of 9 Dow sectors closed in the green, with 80.0% of the index’s constituents ending higher on Friday. Energy (+3.88%), materials (+2.71%) and information technology (+1.40%) were among the best performers, whereas consumer discretionary (-0.76%) was lagging behind.

Technically, the Dow Jones continued its upward trajectory after breaking a key resistance level at 29,850 – the 76.4% Fibonacci extension (chart below). Breaking this resistance level may open the door for further upside potential towards 30,870 – the 100% Fibonacci extension. The overall trend looks bullish-biased, although the MACD indicator shows fading upward momentum. The 20-Day SMA may serve as an immediate support level.

The Hang Seng Index (HSI) appears to have regained some strength after forming a long bearish bar on November 20th. Immediate resistance levels can be found at 27,000 followed by 27,510 – the 200% Fibonacci extension. The MACD indicator has likely diverged with price movement recently, however, suggesting a short-term correction is possible.

The ASX 200 index appears to have entered a range-bound market conditions, with an immediate support and resistance levels found at 6,540 and 6,725 respectively. Traders should be vigilant about a potential MACD divergence, which might signal a trend reversal. The MACD indicator has also formed a “Death Cross”, suggesting that upward momentum is fading.

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