At one point the market dipped to its lowest level so far this year.

Futures trading led the market for much of the day and traded at a narrow premium to the cash market until the late afternoon when it moved higher.

Brokers said much of the trading was related to investors who needed to cover short positions by purchasing shares.

The large fall over the previous four days had left many traders with unrealised profits through short positions in futures contracts, and the feeling was the market was due for a bounce.

Buying continued in overnight trading in London, reflecting the high futures close yesterday.

The Robert Fleming Index was up 105 points to 8,518 in early trading.

''The afternoon rally smacked of short-covering,'' said one derivatives dealer.

He said by the end of the day there was much Hong Kong interest in buying the futures market.

With sentiment rather than fundamentals now driving the market, brokers said people would stay focused on external factors, particularly US bond yields.

Some traders are looking for the index to test the 250-point moving average.

The recent heavy sell-off began when the market broke the moving average last week, and now that the market is recovering slightly some traders are looking for it to test the average again at around 8,750.

However, trading is likely to remain technical and related to futures arbitrage in the coming weeks as investors wait for a strong sign that market sentiment and direction have changed.

While the research houses of the major brokerages remain mixed on the prospects for Hong Kong stocks it is unlikely any strong buying support will be seen.

And while some of the brokerages surveyed were looking at re-rating the market as a buy if it drops below 8,000, it will take a change in sentiment before people buy back in a meaningful way.

When the market was trading at low levels there was no sign any major institutions were heavy buyers.

One very good reason is that fund managers, who constitute a large part of the market, are facing an increasing amount of redemptions.

While the overall picture remains unclear, there are signs the amount of redemptions could grow.

Figures released yesterday show that US$150 million worth of redemptions were made in Hong Kong authorised funds.

Brokers report Asia-Pacific fund managers are having trouble selling their holdings in the smaller markets due to a lack of liquidity, leaving Hong Kong as the market of first recall.

As long as fund managers remain worried about redemptions they are unlikely to resume heavy buying of Hong Kong stocks.

Trading moved in a 203-point range yesterday from 8,451.71 to 8,249.2.

The index opened sharply lower to touch the year's low before rebounding to trade above 8,350 for most of the session.

The morning session closed down 12.81 points at 8,356.63.

Afternoon trading opened on a nervous note, dipping to 8,310 before closing the day slightly higher.

HSBC put on 50 cents to $81 while Hysan Development was the best performing blue chip, gaining $1.10 to $20.70.

Hongkong Telecom bucked the blue-chip trend, closing 30 cents lower at $13.70.