J.P. Morgan - Knockin' on Heaven's Door...

Knockin' on Heaven's Door... Asia Technicals Strategy: Charting The Course

The 1973 Dylan original features a dying Sheriff ...”that long black cloud is comin’ down..I feel like I’m knockin’ on heaven’s door...”.

Asian Markets have felt a bit like that over the last few years – a pall of under-performance built on sideways/ range-bound Asian markets as the US sailed into uncharted territory and even debt-laden Europe continues to trend higher backed by creative central banking. In context, SPX is making record highs and Asia is struggling below 2011 highs, leave alone 2007!

For MXAPJ, the 485-493 resistance zone has proven unassailable on all four attempts (three in 2013 and one in 2014). The latest move, starting with a “morning star” in late March (see “Good Morning Asia”, 26Mar’14), is making one more attempt. Once pierced, the path to upside heaven is a lot clearer. Can we get there? Can we reverse a deep and long underperformance for Asia? We believe the answer to both these questions is YES and that Asia is not a lost cause, yet. Financials and Industrials will likely lead the reversal.

Figure 1: MXAPJ Weekly Chart

Source: Bloomberg.

· MXAPJ Weekly Chart (Figure 1) – 485-493 marks a strong resistance zone (last close 490.15) for MXAPJ. While the May’13 attempt was built on diverging momentum, the latest move appears well supported on RSI and MACD and moving averages. The move started with a “morning star” candlestick pattern in late March and has added c8% over last 2 months. While support from momentum indicators suggests that a breakout has higher probability, we should highlight that long trades need to await a clear breakout. A successful piercing of this resistance zone will bring the Apr’2011 high into play, a level that we see as offering much less resistance.

· MXAPJ Weekly Closing Chart (Figure 2) – On a weekly close basis, MXAPJ’s resistance zone has been 485 and that appears to have been pierced successfully, further supporting our incrementally bullish outlook.

Figure 2: MXAPJ Weekly Close Chart

Source: Bloomberg.

· Under The Hood – What Ails Asia – On a country basis, MXAPJ’s performance has been held back by a range-bound China, Korea, Hong Kong and Singapore (aggregate weighting c50% in MXAPJ and over 60% in MXASJ). On a sectoral basis, Financials, Energy, Industrials and Materials have weighed on MXAPJ’s performance. On a country basis, a near-term reversal from the large under-performers needs much more conviction. However, on a sector basis, we see Industrials’ (Figure 3) relative performance finding support. Financials (Figure 4) are also making one more attempt.

Figure 3: MSCI Asia INDUSTRIALS vs. MXAPJ - Weekly Chart

Source: Bloomberg.

Figure 4: MSCI Asia FINANCIALS vs. MXAPJ - Weekly Chart

Source: Bloomberg.

· MXAPJ vs. MXWO (Figure 5) – Asia’s underperformance is in its fourth year and budding optimism earlier this year has not fructified into a sustainable reversal of this underperformance trend. Technically, the relative index, while unable to sustain its 40wma breakout, remains supported on MACD and RSI, in our view suggesting that while overweight positioning may be premature, underweight positions are no longer that attractive.

Figure 5: MXAPJ vs. MXWO - Weekly Chart

Source: Bloomberg.

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