(Bloomberg) -- Chinese stocks traded in Hong Kong may extend their losses this week after a benchmark index formed a so-called “two-day reversal” pattern on large volumes, UOB- Kay Hian Holdings Ltd. said. The pattern created by the Hang Seng China Enterprises Index’s candle chart yesterday and on May 8 comes after the index first formed a “hanging man candlestick” last week, signaling an imminent drop, UOB-Kay Hian analyst Barole Shiu wrote in a report today. The pullback is likely to be limited by the index’s 250-day moving average. The Hang Seng China Enterprises, which tracks the H shares of 43 Chinese companies in Hong Kong, dropped 2.9 percent yesterday after a 1.6 percent gain on May 8. The index lost 0.4 percent to 9,724.26 as of 2:48 p.m. in Hong Kong, trimming its gains this year to 23 percent.
“We expect the pullback to be shallow,” the analyst wrote.
A candle chart displays a security’s high, low, open and close for each day, and can signal a reversal of a trend or a continuation. A hangman candle is a pattern that signals an imminent reversal as selling pressure is starting to increase after an advance.The so-called negative divergence of the Hang Seng China Enterprises’ relative strength index, a moving average based on how rapidly prices rise or fall, also adds to signs that the measure is poised for a decline, Shiu said. The index’s RSI touched 70, the level that indicates to some analysts that prices are about to retreat, on May 8.Losses may be limited to 9,442, the index’s 250-day moving average and a 3.3 percent drop from yesterday’s close, with a “small” chance that the gauge will decline beyond 9,181, the analyst wrote.
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