Monday, March 30, 2009

Trade: HSI


The HSI enjoyed a steady and orderly climb from 2003 to late 2007, peaking at 31,931.  Notice how the gains accumulated from the bull-run years (about 4 years in total) gets wiped out in less than 15 months in the current vicious bear market.  We are now at the late 2003 level.  Notice also the length of the bars – they used to be short and neat and now they are long and volatile.
As far as divergence is concerned, there is a weak bullish divergence (price made a lower low but the depth of the MACD-H bottoms are basically the same) formed between the bottoms of March 2008 and October 2008.  Prices only managed a pullback back to the EMA.  From there, the picture looked a lot better – prices have stabilized and stopped falling to new lows but the volatility still persist.



A slight (the contrast is not a whole lot but we see a lower price bottom with corresponding higher MACD-H bottoms) divergence is observed.  Prices have since rallied from 11,325 to a close of 14,051 last Friday.  A rally near the lower channel to the upper channel is pretty extended in my opinion – the price bar has turned blue, permitting a short.

Decision:  short.
Second screen:  The hourly and the entry
I shorted the HSI last Friday and placed a stop a tick above the recent high.  The rally did look extended and the R/R looked good.  The risk is small – 160 ticks.  I have place a limit at 13,500.  If it does retrace, 13,500 is very achievable, a 530 ticks reward.  Hence, the R/R is better than 1:3.  The bearish divergence on the hourly confirms my decision to go short.

I covered my short and closed the trade.

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