‘Outstanding’ Taiwan Poised for Stock Gains: Technical Analysis

‘Outstanding’ Taiwan Poised for Stock Gains
Taiwan’s stock index is poised to rally a further 10 percent based on momentum indicators and Fibonacci ratios. Photographer: Maurice Tsai/Bloomberg

Taiwan’s stock index is poised to rally a further 10 percent based on momentum indicators and Fibonacci ratios, according to Auerbach Grayson & Co.

The surge in the Taiex Index relative strength index past 70 on Dec. 6 is “a sign of strength” that confirms a “bull trend” when coupled with other technical tools, not a signal to sell as suggested by “conventional wisdom,” said Richard Ross, global technical strategist at Auerbach Grayson in New York. The index’s jump to a two-year high capped a 76.4 percent retracement on the Fibonacci chart, he said.

“Taiwan is in an outstanding technical position,” Ross said in an e-mailed response to questions. “We love the breakout to a fresh multiyear high. This should set the stage for a test of our initial upside target around 9,600.”

The Taiex rose 0.6 percent to 8,753.84 yesterday, the highest since May 2008. The measure has gained eight out of the past nine days on the prospect closer trade ties with China will allow technology companies to boost sales. Morgan Stanley and Citigroup Inc. this month forecast the index will reach 10,000 in 2011, while Nomura Holdings Inc. turned “bullish,” predicting the equities will be among the year’s best performers.

Fibonacci analysis is based on the theory that prices rise or fall by certain percentages after reaching a high or low. The ratios are based on the sequence discovered by 13th century mathematician Leonardo da Pisa, known as Fibonacci, while studying the reproduction rate of rabbits. Key percentages include 23.6, 38.2, 50, 61.8 and 76.4. Technical analysts use the RSI to predict when unusual gains and retreats will probably reverse.

‘Underweight’ China

“Taiwan is entering a super-cycle as a beneficiary of the peace dividend,” Morgan Stanley analysts led by Frank A.Y. Wang, wrote in a report Dec. 3. With closer ties across the strait, the brokerage said tourism is a “big opportunity” for Taiwan, as more Chinese visitors will increase political stability and cross-strait opportunities.

Ross is less bullish on the outlook for Chinese stocks, recommending an “underweight” based on a negative divergence between price and momentum and a “looming” so-called head-and-shoulders pattern on the Hang Seng China Enterprises Index. The pattern is formed by three consecutive peaks on a chart, with the middle being the highest. A breach of a neckline connecting the base of the three peaks, also a support level, may signal the reversal of a trend.

The index of 40 Hong Kong-listed mainland companies slipped less than 0.1 percent to 12,731.42 yesterday, the fourth decline in five days.

“Chinese H-shares are in a weak technical position as they approach critical support at 12,700,” Ross said.

Chinese stocks have fallen this year on concern tighter monetary policy will slow growth in the world’s fastest growing major economy. The H-share index has slipped 0.5 percent, while the Shanghai Composite Index has dropped 14 percent, the worst performance in Asia.

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