Big opportunity in Chinese stocks?

Lots of questions regarding the big selloff in China of late. Is this one of those times where – as Barron Rothschild once said – “The time to buy is when the blood is running on the streets?” Today, I’d like to examine (from a technical perspective, of course) three questions surrounding investing in the Chinese markets. Namely:

1. IF we should buy,
2. WHEN we should buy (assuming the prior question’s answer is “yes”)
3. WHAT we should buy (assuming the IF answer is yes, and the WHEN answer gives us some timing guidelines)

First, lets look at the big picture, which is the Shanghai stock exchange. Note that the market has pulled back – but not too aggressively when we take the entirety of the exchange into consideration. Also note–not too unexpected–the Shanghai was primed to find a reason to decline when it hit very key long termed resistance around 3650. This pullback, according to basic supply demand chart rules, was to be expected. Should 3650 break out bullishly and if that break holds for a couple of weeks–then we may be in a new era of upside potential. But that has not appeared yet. So…my thoughts are that the broad Chinese market is unappealing at this time. Beyond a short spike to the old resistance.

Next, lets look at the culprit of the recent selloff, which is the internet / technology stocks within that exchange. KWEB is the best known ETF in that space.

New government restrictions and regulations have been flying in the face of these stalwarts. The sectors hit by government intervention include technology, education stocks, internet commerce, and others. Mega-billion dollar, highly successful Innovation ETF, ARK, has reduced its exposure from 8% Chinese tech stocks in February–to under 1% exposure as of now. In other words – a very big player has tossed in the towel on the sector. And I am sure they are not alone. So- keep this in mind. Buyers of this sector are betting early against the big players. That can be dangerous–or opportunistic. Smart money is usually smarter than us dumb retail people- so we should pay attention to their moves. But they are often much slower than we are at moving into beaten down sectors.

Conclusion

So – should we buy? My thoughts are, yes, I believe there are opportunities coming very shortly in Chinese markets – but I would suggest its only appropriate for more aggressive traders at this stage. What to buy? I think that the best bang for the buck lies particularly within the tech/e commerce etc – space of the Chinese markets. Finally–When should we buy? My thoughts are that we need to see some basing action, and (better still) a positive bounce from the base.

Lets pretend you are looking at buying KEWB. KWEB has big support near $40. Its currently testing neartermed support at $48-ish. If $48 (ish) holds for a week or longer, perhaps its time to put one leg of your allotted capital for that position into the market. Then, sell  (mental stop) if it breaks $48 by more than a few days.  Leg in if the stock begins rising – a little each week for say, 2-3 more weeks.

If support near $48 does not hold–look to see it decline to near $40. And then, you will want to see support hold for more than a week. I should note that this is not an endorsement of KWEB–there are many ETF’s with similar holdings and profiles, including the BMO China ETF listed in Toronto. Do your homework, decide which one makes sense–or consider an individual stock–I simply used KWEB for illustrative purposes.

As always- with this type of riskier/opportunistic trade– you should considering legging in rather than putting any significant amount into a position at any one time. This might mean: wait for support to prove for a week. Then buy 1/3rd of what you think you want to hold. Then, buy another leg perhaps a week later. Then, look at it again another week later for your last third. Yes, the market might rise and you are buying higher. This is the price of safety and following a logical plan. Important: Keep a mental stop loss below the support level you bought off of. That way you know your risk. Stick to it.

Your input is appreciated

As noted last week–we are thinking of putting together a course (or courses) on technical analysis. This would be a professionally recorded and structured program with lessons, quizzes, etc. I’d be very grateful if you would take five minutes to answer the following survey to determine the need for such a program (its even multiple choice to make it super quick to answer!).  Here is the link.