CLSA Global Technicals

Accelerating

Both the Hang Seng property sector and commodities surge.

Laurence Balanco (852) 26008576 laurence.balanco@clsa.com

In recent weeks we have highlighted the commodity market’s breakout and acceleration and we have recently seen the Hang Seng Property Index surge to new highs for 2009 on strong volume. B arring any surprises from the USA (the S&P500 needs to remain above the 50-day EMA), we expect a quick blowoff move up in both markets. Aggressive traders can look at taking some long trades here, but long-term investors should consider using a melt-up phase to reduce exposure.

Surging higher. Recent price action in the Hang Seng property sector has been positive. We’ve seen an aggressive rise of over 7% on strong volume (above the 90-day average). As such, we would fully expect a quick blowoff move up 11-18% to 33,600-35,900. We do not expect to see significantly more than this level attained in the near term, as we are nearing the completion of the pattern off the March low. It would take a reversal below 27,870 to invalidate the bullish near-term outlook.

Property stock review. We review the top four stocks in the Hang Seng property sector, which accounts for 80% of the index, in order to highlight key support and resistance levels. Sun Hung Kai Properties (16 HK - HK$126.80) offers the most upside until chart resistance at HK$143.00-144.00, up 12%. Hang Lung Properties (101 HK - HK$31.40) shows the least amount of upside to next resistance at HK$33.90-34.00, a 7% rise. See yesterday’s Price Action Asia for details.

Acceleration the sign of maturity. A sudden acceleration in trend and volume is typically a sign of a trend ending. An acceleration of a trend typically indicates an exponential influx of new buyers, while unusually high volume signifies that a “new generation” is buying, which means that the latest surge of new buyers will run into losses on only a small decline. The problem is in knowing how far the acceleration phase will take price action, but a red flag should be raised nevertheless. We believe some commodities and the Hang Seng Property Index have entered an early phase of acceleration. Tactically, we think aggressive traders can look at taking some long trades in these markets, but long-term investors should consider using a melt-up phase to reduce exposure and lock in profits.

Focus on copper and crude. Price action in copper futures (HG1- US$302) overnight was strong, ending a brief two-month consolidation pattern below US$295 resistance. The next upside target is US$325, a resistance level that includes the highs and lows from August-September 2008 and the 78% retracement level of the 2008 decline. Crude oil continues to work its way higher after breaking out of a three-month consolidation pattern earlier this month. Next resistance is at US$82.70, the 62% retracement level of the 2008 decline, and then the measured move objectives at US$92.00-95.00. It is worth noting that BHP (BHP AU - A$39.83) has managed to push above resistance provided by the upper boundary of a more than two and a month old consolidation pattern. The breakout suggests an upside target around the A$44.00 area. I would not expect to see price action push significantly higher than this level in the near-term, as we are nearing the completion of the pattern.

Commodities: Enter the laggards. Coffee, rice and cattle futures are set for base breakouts and further gains in the near term. Stocks in Asia that could benefit from such breakouts are BISI International (BISI IJ - Rp1,900) and Australian Agricultural (ACC AU - A$1.49)

A-share breakout revisited. A break above the 3,000-3,100 resistance zone for the Shanghai Composite (last - 3,070) would be considered bullish and the market should be bought in anticipation of a move to new recovery highs for 2009 - above 3,478.