Chart Patterns Suggest Opportunity in Chinese Stocks

March 28, 2022No Comments


Hello again, and my name is Keith Richards, and this is the Smart Money Dumb Money show. And today we are going to talk about China. There’s been a pretty nasty markdown on the Chinese stock exchanges for many reasons, including a new bout of COVID and a possible fear anyways, of a coalition with Russia and generally a pullback in their economic growth, which doesn’t exactly help the case for buying Chinese stocks, or it has not anyways. But as with everything in life, things become overbought and oversold or in the real world, overdone or underdone. People tend to swing emotionally and otherwise in various directions. You’ll see that in politics, you’ll see that in all kinds of trends where people go through fashion trends and things get very overdone. Does anybody remember elevator boots from the 1960s? Those were extreme, but I was just a kid when those kinds of shoes were out, but everybody back then wanted a pair of elevator shoes.

And I remember seeing them as a young guy. So those are extremes, fashion extremes, stock market extremes, political extremes far left far right. Seems that Canada’s definitely, with the new changes, going towards the extreme left now. And hopefully, we see that swing back sometime in the future because everything tends to in the long run, come back to a median range. And I think China has gone from an extremely high point to an extreme low point. So that begs the question, especially as a contrarian investor, which I am. I wrote the book on it, in fact, Smart Money, Dumb Money. It begs the question, is China a buying opportunity right now? It’s pretty undeniable that the Chinese stock exchanges and the stocks they’re in have sold off pretty hard. So I’m just gonna look at three charts today. And really the question is, as you’ll find out, still fairly unanswerable, but it gives us an idea of what the next steps might be for us as investors when we start to review China?

So let’s take a look, I’ll share the screen and I’m going to bring you right into an ETF that represents the MSCI China index. So that’s really the whole ball of wax. It’s all Chinese stocks that trade. And there’s really kind of two ways to look at Chinese stocks as, other emerging markets, by the way. And that is that there are some Chinese companies that follow international accounting standards and they are considered the more reliable when it comes to their reporting and whatnot. And they’re called the A shares. A, the letter A and then we also have the rest of the shares and this index has them both. It has standardized reporting companies that follow international standards and then it has companies that report using Chinese standards. And some might consider that companies with international reporting standards might be a little bit more reliable in their earnings.

That’s for you to research and decide if that’s true or not. But whatever the case, this is the whole ball of wax right here. So it’s kind of like looking at the New York Stock Exchange Index, where there are all the stocks on that index for New York. So it’s a better representation of the big picture, for example, in US stocks, but it’s not necessarily what most people are trading. That’s why we tend to look at the S&P 500, for example, as an index that looks at what most people invest in versus what all stocks are trading. So this is the equivalent of an all-stock index, and you can see that that index did quite well and peaked out into the beginning of 2021. And you’ll find that commonality throughout the charts we’re gonna look at. It fell hard, and now it’s come down to a very significant level of support.

I could have drawn a line here and I should have where that first level of support, which would’ve been 2018 high. You can see that the market paused out there very briefly in this cluster here and then fell to this next level. Now, recently we saw a big washout on China, and that creates, on the monthly chart, what’s known as a hammer candlestick formation. Now, this is a monthly chart, but it’s interesting because hammer formations if you take my technical analysis course tend to be very accurate in predicting a turnaround. Take a look what happened here? There was a hammer and there was a hammer. And you see both times the market reversed directions. Now you can get inverse hammers like here and the market reversed directions there. So this could indicate a possible reversal in direction, and maybe this support level, which on this ETF is around 52 and a half dollars.

Maybe this $52 will hold. And maybe there’s an opportunity. The risk is that if this breaks then you know your next level is about $10 lower on support so keep that in mind. But that’s interesting to see that hammer and I thought I would point that out. Now, remember, this is the broad index. You can buy this type of ETF. There are a few broad index ETFs out there for China. This isn’t the only one and they all look the same. So this may be an opportunity. What I tend to do though, is I wait for confirmation and I like to see the market move off of that support level and we’ll see if that happens. Now, let’s take a look at another monthly chart, which is the high-quality Chinese stocks. That’s the A-shares. So these are the stocks that follow those international accounting standards and the Bank of Montreal BMO ZCH ETF is the way or one way to play that group of stocks and it’s a Canadian listed ETF.

I’ve traded this ETF many, many times, and it’s a very good instrument. It’s relatively liquid and it definitely gives Craig and I at ValueTrend a comfort level knowing that we’re just focusing on the stocks that aren’t performing any monkey business with their books. So you can see that I could have drawn a line here just like on the last chart. There was that kind of 2018, 2019 level that acted as a level of support. Throughout here, it was broken. The market didn’t even really pause as it hit some much more significant support. And it’s recently broken down into this zone, which is somewhere around $15 and 15 and a half, I would say. Well, what do we have here is on the monthly chart we have another hammer candlestick. So again, there could be an opportunity here on the higher-quality stocks in the Chinese stock exchange, but you know, the way I do things. I suspect that many of you watching this video have taken my technical analysis course by now.

And by the way, that course is going up in price in the next few weeks. It’s currently available at $100 and it is expected to go up to $500. And I haven’t got a date yet, but we are definitely going on a much wider scale with the course and the period of me selling it cheap to the faithful viewers of my videos and readers of my blogs are quickly coming to an end. So if you haven’t bought it, then you might want to do so. Whatever the case, in my course I always emphasize that if you see something like a candle stick like this, you need some sort of a bounce and a breakout out of a consolidation, or even a candle stick like a hammer where the market starts to move up. Yes, you are buying higher, but it confirms that that candlestick or that consolidation is valid.

We don’t have that confirmation yet. So just keep that in mind, but it’s very interesting that it is happening right around a significant level of support. So that’s the high quality stocks. Now the final chart I want to look at is kind of a very well followed part of the Chinese market, just like here in North America, the NASDAQ represents technology growth and biotech type stocks. And there’s been particular emphasis on the technology and growth type stocks within that index. And it’s been very well followed over the years. It had been making people a lot of money and now, of course, the NASDAQ has taken a real kicking. And that is what you see here on the Chinese technology and internet ETF, KWEB. Now, again, this is not the only ETF and none of these are recommendations for you. These are just examples because quite frankly, there are many competitors in this space, in the Chinese stock and ETF space and many competitors within each sector of China.

So I’m using KWEB simply because I’ve traded it before, but it doesn’t mean that it’s the one you should look at. It’s a good chart. I like to look at the very obvious areas of support and resistance and you can see that, in fact, this is absolutely textbook perfect where you have a consolidation where support and resistance were playing out between basically the year of 2014 right out until 2017 when it broke out. So here we are. We have broken down. So you will remember that old resistance, which in this case back in 2014 to 2017 was around $37. Old resistance became new support. And it did. So we recently broke that level of old support, and we are now kind of midway between that very old trading range. So if the market were to fall more for the Chinese internet stocks, I think what we’re going to see is that it’ll probably get down to around that $27 level, which is around here.

Meanwhile, what do we have once again? One of these hammer candle formations on the monthly chart, and that again, can be a very bullish formation. So just like I mentioned in the other two charts, we don’t kneejerk react to this candle because it could break down. Instead, we wait to see if it does in fact, start to move up. If it moves up, and actually in KWEB’s case, if it broke, say $37 to the outside, you’d probably be looking at a $57 stock or a $57 ETF, I should say. Well, that’s a pretty nice trade. Now I want confirmation. I would much rather buy this at $40 and play it up to 57 than take my chances and buy it at 32 or 33, where it is right now or 31, I guess. So I know it goes against a lot of people’s instincts to buy higher, but it’s the safest way to trade.

So what I am presenting today is an argument to suggest that China is not yet ready to buy. So this is a non-recommendation at this point to buy China or any of the parts that make up those exchanges we just looked at. But it’s not a sell recommendation either. What this is, is a keep your eyes open recommendation because China may be setting up for a very good trading opportunity. I really do think that this could be an opportunity, but you don’t know and I don’t know until it completes some sort of a consolidation and a move up. So those hammer formations that we saw on all three charts are the real McCoy. If they’re real, if they’re legitimate, we are going to see a movement up very shortly on the Chinese stock exchanges. And if we do see that, then there is a pretty good argument that we will see more follow through to the upside.

So my suggestion is, keep your eyes on the ball. It may take another month but I think it’s worth watching. And if it breaks down, you can be thankful that you didn’t buy. This is a moment of truth for the Chinese stock exchanges. The setup is there for a possibly positive move, but it’s just like the worm on the hook. You don’t wanna buy it if it’s a head fake and something that could hook you and turn you into someone else’s dinner. I don’t know if that’s a good analogy, but it’s all that came to my head at this moment. Anyways, Chinese stock markets, particularly the internet stuff is looking interesting right now. Let’s keep an eye. Thanks for watching. And we’ll see you again next week.

 

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