The good news for Chinese stocks is that they have recovered well from the lows in March. This is explained by the fact that China first suffered from the new coronavirus and that it is getting ahead of everyone else. Today’s thesis is therefore simple because it is expected that Chinese equities will also recover more quickly. In addition, reopening the rest of the world would also help China maintain its momentum. Today we are discussing three ways to negotiate the Chinese recovery phase.
While this sounds easy, the bad news is that the majority of Chinese stocks peaked in 2018. The index highs in January were still 15% below the peak two years before this crisis even. There were actions that did better than others, so it’s not bad at all. It is important to note that there is an additional wrinkle and that it revolves around fraud. Recently, two leading Chinese companies, Luckin Coffee (NASDAQ:LK) and Iqiyi (NASDAQ:IQ), are accused of scheming. The following stocks have rocked all Chinese stocks and Lukin is still on the books. So it definitely casts a shadow over the rest of the pack. For example, the sector was down on Wednesday when the S&P 500 increased by more than 3%.
But there are still a few Chinese actions that are worth considering at this time:
- iShares Trust – iShares China Large-Cap ETF (NYSEARCA:FXI)
- Ali Baba (NYSE:BABA)
- Baidu (NASDAQ:BIDU)
With all of that in mind, here is what you need to know about each opportunity.
Chinese stocks to trade: iShares China Large-Cap ETF (FXI)
Sometimes it is difficult to choose the winners in a group. It’s easy to have a thesis that Chinese stocks should recover, but choosing the right one can be difficult. For example, those who bet on LK or IQ have lost a lot due to surprising headlines. While the black mark will spread in sympathy to the whole group, this effect is temporary. Instead of risking single stock stories, investors can cast a large net by betting on an exchange traded fund via the FXI.
The downside to this is that you don’t have a specific fundamental trigger. The rally therefore depends on the momentum that is built from the individual components. This week, the FXI attempted to exit $ 38 per share, but has reached resistance from previous pivot levels. The slog from here at $ 41 per share is indeed full of resistance. Bulls will need a strong conviction to be able to get through all of this. The good news is that the relative strength index suggests they could do it, but it needs help from general markets. Patience is a virtue in this case, because the economic data will be horrible.
The good news is that there is support below 14 years of age. It is a base that bulls can use. Option traders can also sell bullish spreads to generate income without needing a rally to profit. This support also means that the long-term trend from 2009 can remain intact. Since then, FXI stock has established lower levels. This hard accident that we just experienced did not cross this line, in fact it embraced it almost perfectly. So my assumption is that the bulls will stay in control and continue to ride until they break the resistance. It will take time but it will happen without another shoe falling.
Unlike FXI, Alibaba stock has in fact set new all-time records this year. But he also suffered from the crash of the virus.
However, he is in much better technical shape than anything here. The long term trend is still very positive and intact across all tests. The bulls are in full control, as the BABA title continues to fall. And for the past two months, he has also established lower heights and it is tightening in one point. Usually this means that there is a movement to come, but the direction is not yet defined.
The long-term chart also suggests that the April trough could be used as a benchmark for basic bulls. This is important because it could act as the October low at $ 160 per share. It would be the certainty that investors need to progress in the future. The BABA share has also just reached the goal of a breakout model starting at $ 189, so I expect it will face resistance close to $ 200. It would be normal for the price to be erased and to retest the neckline that it has just erased. This would allow him to gather new vapor to tackle the above necklines.
Like the FXI, the BABA share benefits from support of $ 170 per share. This is the confidence that fans of the stock need to continue their mission. But if they lose that, the conversation changes, as it would trigger a potentially nasty bearish pattern that could lead to another big correction. While this is not my basic case, it is a scenario that investors should be aware of.
On a secondary note that has nothing to do with its actual activities, the management of Alibaba turns out to be a solid team. Just yesterday, Salesforce (NYSE:CRM) CEO Mark Benioff shared in an interview with CNBC that BABA has helped other countries obtain protective gear to help fight the villain from Covid-19.
The Baidu stock is in even worse shape than the FXI. It was already a broken stock even before this crisis. For some reason, bulls cannot keep their momentum at all. He has continuously established highs and lows for almost two years. The promise of the 2017-2018 summits ended with a double summit which precipitated a crash of 70%. His ties to IQ certainly don’t help his cause this week.
The graph suggests that something must give. We should soon find out that the company is not down and that the stock will explode considerably. Or, conversely, it will lose the 10-year support zone and crater at $ 50 or less. I have no reason to believe that this is the time when Baidu will lose support, so my base scenario is that the upside scenario has better chances.
It will not be easy because there is a ton of resistance to climb. Each ledge which served as a hatch will become a test to beat while climbing. So, for investors who bought the BIDU fund, it would be wise to cut or reserve profits close to $ 110 and $ 120 per share. He is likely to stall on any rally through them. So the questionable part of the rebound is sustainability, as it is difficult to follow up with BIDU actions. Let’s not forget that the first step is to maintain the line; otherwise, a disaster ensues. It sounds scary, but it is a graphical reality that exists.
Of the three kickers today, Alibaba’s stock is the one that seems the healthiest. If investors want to bet on outsiders, Baidu is the one who buys here. Otherwise, using the FXI would be the way to throw a long cover over the entire recovery of Chinese stocks.
Nicolas Chahine is the managing director of SellSpreads.com. Join her free live chat room here. At the time of writing, he had no positions in any of the above titles.