Correction or crash?

Hong Kong stock market has come to a critical moment. After reaching the record high of 33484, HSI is now in a downward trend of more than 8 months and has fallen around 7100 point from the peak. It is controversial whether this plunge is a correction only or the beginning of a crash. Naturally no one can for sure predict when the valley will be but we can review the history in the hope to find some clue?

The below is the chart of HSI in the past 40+ years.

Hong Kong stock market has experienced 10 crashes over the past 40 years since 1969. The below is the detailed summary of each boom and bust.

From the summary, one can see the booms took from 1.5 to 6.5 years while the bust lasted from 1 month to 3 years. The shortest adjustments happened in 1989 due to the massacre in Beijing followed by the Black Monday in Wall Street in 1987 which lasted for 2 months. So far the HSI has fallen 8+ months and with about 47% adjustment for the boom magnitude from the last valley 18534 in 2016 to 33484 in this January. The duration and adjustment resemble the crash in 2011 caused by the Euro debt crisis which is the mildest one in the ten crashes in Hong Kong history. However, personally I do not see the two debt crisis were crashes despite the Greece crisis has an adjustment of 92% because the peaks before the happening of these two crashes have never exceeded their previous peak 31958 in 2007. They were merely correction, big ones only.

According to Elliot Wave Theory the HSI current cycle started in 1998 August at 6544 with wave 1 ended in 2000 March the burst of dot.com bubble followed by wave 2 ended in 2003 April. Wave 3 topped in 2007 October the suspension of HK stock connect followed by wave 4 ended in 2009 Mar so the peak in this Jan could be the top the wave 5 and this 8+ months plunge is wave A accordingly. If this cycle is established then HSI is going to be the downward trend of the existing cycle so even if there will be a rise in the future but it is merely the wave B only. The final plunge wave C is still inevitable.

Judging from the past record, a true crash usually lasted a year or so and with adjustment of around 80%. If the current fall turns out to be a correction then according to the previous ones then it should  finish very soon and there will be even higher level than 33484 as well. However, the reality is that the trade war between the U.S. and China is going to be worsen. On the other hand, a global liquidity squeeze is on its way in the years to come. Despite the DJIA keeps breaking its record but chances are more likely to fall than further hike. When the fundamentals are turning sour then the probability of HSI is heading to a true crash is rising. If it is going to a crash then the past record revealed that the usual adjustment is around 80%, meaning a fall of 12,000 points from 33,484. It means there are still 5000 points to go till the 19,000 level.

However, if base on my view that the two debt crisis are big correction only then the departure point should be the valley after the suspension of HK stock through train followed by Lehman Brothers at 11345 in 2009 when QE began. Therefore the total hike is 22,139 points. With usual 80% adjustment it means a fall of 17,700 points so the valley of this crash, if really it is one, will be around 15700 level!

Hold tight, man!