Chinese Stock Outlook

August 25, 2021No Comments


Well, hello there and welcome to the Smart money Dumb money show. And I’m your host, Keith Richards, I’m President and Chief Portfolio Manager at ValueTrend Wealth Management. And for more ideas that extend beyond what we do on this video, please visit the value trend blog, which is www.valuetrend.ca. And there is a search engine you can utilize where if there’s a topic that you want to explore, I’ve probably covered it in the world of investing. So, if you’re interested in oil or gold, or what’s the market going to do, take a look at our blogs, I’ve got a history. I think we keep a couple of years’ worth of blogs on the website. So, there’s many, many topics that you can research on if you’re interested in Bitcoin or Tesla, or any new popular name try typing it in on our blog.

It’s a great resource for anybody interested in technical analysis of the stock markets. And because this is a technical analysis video, we’re going to jump right into a chart today. We have one topic only we’re going to discuss, and that is China. Now I recently mentioned on one of my blogs that China may be one of those opportunistic plays or not. And so, this is really one of those semi dangerous, you know, for risk takers, only type of plays. And yet there could be a very oversold action that’s happening on the, on the Chinese markets. Now, a lot of the focus has been on the technology stocks and the educational companies that are listed on the major Chinese stock exchanges, like saying hi, keep in mind that whenever I invest in Chinese stocks, I stick to ETFs or specific companies that are, that are A shares.

And they’re usually trading even on New York stock exchanges. ADR is American Deposit Receipts. So, we’re just going to take right now, look at the full index though. And these, of course, because these A shares that companies like Alibaba and Tencent and whatnot are major components and therefore as capital weighted stocks that have a bigger influence on that index, they are driving that index down. However, it’s interesting because I was just looking at a consumer staple on the Chinese stock exchange this morning. And it had fallen a little bit in sympathy with the Chinese markets, but nowhere near as bad as Alibaba and Tencent has. So, keep that in mind. It’s really index is being driven by some very specific sectors that the Chinese government is targeting with new regulations. That’s why there may be opportunities. So, let’s, let’s take a look.

And this is the I shares Chinese ETF. The, I shares China ETF, I should say. And what we’re looking at here is I’ve drawn some support lines and you can see where this index ETF, which is very closely representing the Shang HAI index has pulled back to and you can see there is some level of support somewhere on 39 on this ETF. And in fact, it’s bounced off of that a few times in the past year and a half or so. And it’s just toying with that right now. I did a quick spike below, but generally speaking, somewhere very close to 39, it seems to find support. So, we don’t own this particular ETF, but we bought a Canadian listed Chinese ETF. And we bought a very small amount in our equity platform. And only a marginally larger position in our aggressive strategy because we realized that this may be a risky or non-performing asset for us.

We really didn’t want to take a huge position. We do things like legging into the market, which means that rather than commit the entire amount that you would actually intend to commit to a position like this. You put a toe in the water. You buy say if we, our typical position is somewhere between four to 5%, if we’re really fully invested in a particular stock, typically it’s 3%, but we will go as high as 5% and in some situations, so what we did with this particular play is we bought 2% in a broad China, A share listed ETF. And if it fails a certain support line, then we will get out. And that support line, which is not the same price as this particular ETF would be somewhere in this particular ETF around $39, but if it fails it – we’re out, okay? You got to have trading rules.

Our trading rule is, hey, we’re going to buy a little bit, see if it can hold if it holds great, we will buy more on the way up. But if it doesn’t hold, we’ll sell. All right. So that is the closest support level. And you can see that longer term support resides around 36 and a half. Now, why wouldn’t I hold the stock? Even if it fell to 30, below 39 and he started getting close to 36 and a half? Well, the reason is because, you know, we paid in our case closer to what would be the equivalent of 41 on this chart. So, we’re actually underwater a little bit on this particular position right now. We’re okay with small fluctuations. We don’t worry too much. We’re just looking at the main support line, but if it breaks that first support level, we know that it’s highly likely to get to the old support level.

And that’s too much for us. We don’t want to take a 15% loss on the stock. We would rather sell it and then revisit if it can possibly find support down there. For now, we are hopefully we’ll find support because it’s so oversold. And let’s look at evidence for that statement. So, these are momentum indicators that I’m going to look at. The first is the fastest momentum indicator. Some of you might be familiar with stochastics. This is the full stochastics with both the trigger line and the very short-term moving average that it uses. And you can see it’s very oversold. Now, stochastics is very quick to get overbought and oversold, as you can see, it’s not something you trade off of a measure after very sharp moves, but it does help. It tells us that, hey, you know, every time it seems to get down around that level, there’s at least some sort of a move. It’s in that area.

Now more importantly is RSI. RSI is more of a midterm looking momentum indicator. And when it goes, it doesn’t very often get into that oversold level, which is below 30. But when it does, it does tend to trigger or indicate some pretty significant opportunities. And you can see that happened back in early 2020, of course, around the COVID crash. So, we’re a little bit interested that RSI has in fact moved just slightly below that trigger line. So, it looks a little bit oversold from the midterm indicator. This is comparative strength to the, to the S&P 500 and no kidding. It’s underperformed, the S&P. Now here’s a big momentum indicator and that’s MacD. Now, ideally you will want to see MacD hook up. Like it did here. We got a stochastic signal. We got an RSI signal, and then it took a little while longer, but then Mac D hooked up.

You can see that the fast line of the Mac D moves through its own moving average, which is here as well as if you look at the oscillator, which is this blue set of bars, it crossed the zero line. So that’s, that’s the trigger. A lot of technical people will use to buy. It’s nowhere near that right now, it’s still in freefall. So, the only positive I can point out about this is that the MacD histogram, which is these blue bars here are kind of flat. They’re not making new, lower lows. So that that kind of often indicators that did hear the potential for an upcoming rally. So, it’s, it’s still in freefall. The longer-term outlook is still very questionable, according to the momentum indicators that we, that I look at and the moving averages, as you can see here have done a bearish crossover.

This is the 200 day that’s the 50th cross. So, this is really a speculative trade right now. If you think that maybe these triggers will indicate a short-term turnaround, then it could be a good trade, but I would not commit much to the Chinese trade in it still doesn’t look like it’s yet ready to turn. So be careful. The only positive thing I can see from a longer calm perspective, as I said, the short-term perspective actually does look somewhat encouraging with the recent oversold moves into, in the momentum indicators. But the longer-term move is pretty good. When you look at the accumulation distribution. Now, this is just the amount of money flow going into this particular ETF. It’s not into the Chinese stock exchange itself. It’s just this index ETF, but because this index ETF is an American ETF, it’s an I shares, which are very, very big ETF company that indicates that there’s a fair amount of interest still in the Chinese market.

And this has been going on really since the middle of 2020. And it really hasn’t faltered much. It’s come off a little bit here, but you can see the trend is that money is still funny enough flowing into this ETF and not actually can be positive because if money continues flowing in, even when it’s getting beaten up, that can, again, signal that things are maybe as bad as it looks. So that’s my take on the look of the current Chinese market situation. It’s not a bad idea for speculative investors to perhaps consider taking one leg into the position, but don’t put too much. Have your stock rule so that if it breaks the line of support, like I’ve shown you on the video today, get out, okay, wait, it breaks your support level. You wait a few days to see if that’s just a spike and then you get out. Just as an example of a spike, which was a spike.

It broke below the support, but it didn’t last. That would have probably that’s a weekly chart, so it was probably it was only a day or two. So, keep it in mind that you’re going to have to have a sell discipline. You’re going to have to have a discipline for legging in if the trade does work out to your favor and keep in mind that this should be at this point for your mad money only. So, thank you again for watching our videos. I do want to point out that as you probably know, I’ve written a book recently on contrarian investing and China was actually one of those ideas that I see from some of the contrary and indicators that look at that does present a possible opportunity. So, take a look at the book it’s called Smart money, Dumb money, just like the name of this show.

And if you have any questions about your own portfolio, please give us a shout. You can get ahold of me through the ValueTrend website. There is a contact us button. It’s really just going to bring you to an email that go that brings us to [email protected] And that actually comes directly to my mailbox. So, if you have any questions about running your portfolio, if you’d like us to talk to you about that, then we’re happy to do so. And if not, we offer all kinds of educational materials on our website, as I said. So please have a look at valuetrend.ca And you’ll find all kinds of good trading information in there. Thanks for watching. And you have a great day.

 

Never miss another video!

Get Smart Money Dumb Money videos delivered directly to your inbox.

Recent Posts

spx

Near termed timing system suggests rally

dow jones

Here’s One Chart Pattern You Can Profit Off of in Any Market Environment

cpc

Have we seen the Bear Market Bottom?

SPX

Ask Us Anything – Answers

gold-

Here’s What Needs to Happen Before Gold Prices Rise

twochahrts

Market Outlook with Craig Basinger, Chief Market Strategist at Purpose Investments

Keith's on Demand Technical Analysis course is now available

Scroll to Top