Chartist Who Called Tencent Rout Says China Rally Just Starting

  • H-shares may rise past 11,000, Bernstein's Nagaraj says
  • Said last April Tencent would drop 20%; shares fell 16%

Back in April last year, Ayush Nagaraj looked at the charts and said Tencent Holdings Ltd. was poised to plunge. It did. Now he’s making a new call: the rebound in China stocks in Hong Kong has room to run.

The Hang Seng China Enterprises Index will rise 6.9 percent from Thursday’s close to at least 11,000 after forming a pattern known as a double bottom, said Nagaraj, a sales trader and chartered market technician at Sanford C. Bernstein & Co. This shows a drop, a rebound and then another slump approaching the previous low, usually signaling shares are poised to climb. The Hong-Kong based chartist said at the start of April 2014 that Tencent was set to tumble 20 percent in six weeks; by May 8 that year the Internet company had dropped 16 percent.

The H-share gauge climbed 13 percent through Thursday since forming the pattern with its intraday low on Sept. 29. That follows another intraday low on Sept. 4 and a 12 percent rebound to an intraday high in between. For Nagaraj, the advance is set to continue, even after the index dropped 1 percent on Thursday as mainland equity markets opened from holidays. The measure added 1.2 percent to 10,406.79 at the close on Friday in Hong Kong.

“With the double bottom confirmed, the Hang Seng China Enterprises Index could go higher from here, past 11,000,” said Nagaraj. “It indicates that in the medium term the downtrend for the index could be over.”

HSCEI Confirms Double Bottom
HSCEI Confirms Double Bottom

The Hang Seng China Enterprises gauge surged 13 percent in five days through Wednesday, as automakers rallied on a tax cut to passenger-vehicle purchases and energy companies gained on higher oil prices. Investor sentiment has also improved after disappointing jobs data from the U.S. pushed back expectations for an interest-rate increase this year.

Upside momentum for the equity index has been increasing. The 14-day relative strength index almost doubled in five days to 61 on Wednesday, the highest since May.

In technical analysis, investors and analysts study charts of trading patterns to forecast changes in a security, commodity, currency or index.

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