Opportunity in China

May 30, 2022No Comments

Well, hello there and welcome once again to the ValueTrend Smart Money, Dumb Money video. And today is the 26th of May. And the reason I didn’t even have to look at the calendar for that is because today I am doing a MoneyShow webinar. Now you are going to get this video too late for catching the MoneyShow video. I have tweeted it out and whatnot, so hopefully some of you catch it. I am hoping that the MoneyShow will record the presentation. And if they do, I’ll see if I can put a link on the blog to allow you to see the webinar, because it’s going to be a webinar on dealing with the current bear market. It’s actually a webinar that I’ve conducted in the past. It comes from the lessons I learned in 2001. If you read my book, Smart Money, Dumb Money, you will see the live play by play that I did during 2008 based on the mistakes I made in 2001.


And we came out as a firm, ValueTrend, we came out of 2008-2009, smelling like roses. We were literally break even by the end of 2009 and most people were so far underwater it’s insane. So one of the things we were doing then in ’08, we are doing now. And if you were to go to our website and take a look at our performance to date, you will see, we are once again, doing quite well versus the markets. We’re actually protecting our client’s capital. And the system I teach in my online technical analysis course is exactly the process that I have been using now and have been using in ’08 to deal with this bear market and past bear markets. And you can use that program that I teach in my course to even trade smaller corrections. For example, we traded 2015.


That summer was very, very volatile. We traded in 2018. You know, we’ve caught many of the ripples in the market that allowed us to trade effectively, protect our client’s wealth and actually profit by trading the dip. So our, my presentation at the MoneyShow is called Bold Bear sorry, Bull Bear, Bottom and Bounce. And it’s really outlined in my course on how to follow that program in detail. And it’s also outlined in a certain amount of detail, although not as much as in the course, in my book, Smart Money, Dumb Money. So I do encourage you to visit one of those venues to get an idea if you’re concerned about the current bear. Now, today, I am going to be talking about China. And the reason it’s come up is China has been in a crash and burn type of market for a while now.


The US market has been selling off for the better part of six months, but the Chinese markets has been, have been pretty volatile for about a year. So I want to talk about that market because some people are just starting to ask me if this is a buying opportunity. I literally get some more aggressive people, including some of our clients, asking me well, what do you think about China? Because they are reopening, as some of you might know, China has been locked down from COVID. They have this kind of draconian policy of, you know, no cases of COVID, which is like saying everybody in one of the world’s largest populations, if not the world’s largest population, must never get a cold or must never get the flu. COVID the virus, some people are going to have it just like some people are always going have a cold within a massive population.


So saying no cases is pretty, you know, draconian. Brooke Thackray, who is the author of the Thackray Guides and he’s the manager of the Horizons Seasonal ETF, he writes a newsletter and I subscribe to it. And one of his most, I think it was his most recent newsletter, he did a comment on that, on the China lockdown for COVID. And because of the logic I just mentioned, which is it’s almost impossible to control any virus to zero cases. Like try saying everybody in Canada should not have a cold in the winter. People are going to have a cold. People are also going to probably get COVID every year from now on in the winter and we just have to accept that, I think, to a certain degree. It’s like every virus. They come, they go in the warm weather. So to ask China to suggest that they’re not gonna have any cases of COVID before they reopen everything is probably an impossibility.


And they probably know it. And Brooke’s theory is that they are purposely using this COVID excuse to slow the supply chain to further pressure the US to open up maybe trade deals or to just hurt the US and North American even European economies. So I think that’s an interesting theory. He was just, Brooke likes to do a bit of a commentary at the end of his newsletters after he goes through the charts and it’s his opinion and speculation, but I just thought it was a very interesting opinion because really, as he says, what else could it be? Because you just can’t control the virus to zero cases of anything. So let’s just take that for what it is. Anyways, I’m here to talk about the stock market. I’m here to talk about the Chinese market in particular. Is there an opportunity? I’m gonna give away the punchline right now.


My opinion is no, but I’m going to show you on the charts why I feel that way. Now there may be short term opportunity, but I’m really not interested in it myself. And I can be a bit of a trader as some of you know, so I’m not the usual portfolio manager that says just buy and hold and watches the market fall. I like to trade in and out of things. In fact, as probably most of you know, we’ve been, at ValueTrend we did call this market back in January and we took a strong evasive action at the very first week of April and that saved us a lot of heartache. We’ve been anywhere between 25 to 30% cash. We’ve actually been stepping in a little bit lately but we’re still pretty heavy into cash. And so we’re very active people and because we’re active, you’d think, well, maybe we’re opportunistic and might look at China, but I’m going show you why we’re not buying China yet.

Doesn’t mean we won’t in the future. So let’s just get the share screen and I’m going to pull up the, this is the Shanghai, and this is a pretty long chart. In fact, for those of you who follow my blog, you’ve seen this chart before. I keep my charts in kind of folders within StockCharts.com. And I keep all my old notes. So you can see what I was thinking way back when. For example, back in the 2010-2014 period, I was identifying a down trend followed by a breakout, and we actually did trade that. Now you see it broke down and there’s this humongously long term, like since ’09 level of resistance, that for a short period of time, it broke through, but basically has been very, very predominant in the way the Shanghai has traded. Now, the Shanghai has both the A and B shares.


So if you know anything about the Chinese market, there’s A shares that are supposedly ascribing to certain accounting standards. And then the B shares that do not. So you can actually buy ETFs. For example, BMO has one that we have traded in the past that we don’t want to position right now. And it’s only the A shares. So at least you’re buying, hopefully, companies that are well managed and reporting properly. That aside, if we look at the Shanghai, you can see that once again, recently back in the early part of 2021, and right through that year, it was struggling with the highs that have acted as resistance, literally since 2020 or 2009, I should say. So you can see many, many touches here, many near misses. And so that’s a pretty good level around 3,600 on the Shanghai. So now here we are, where it’s depressed quite a bit.


It’s falling quite a bit, and you’re starting to see a little bit of a, if I were to zoom in here, you would see that’s a bit of a hammer candlestick and that as you know, if you’ve taken my technical analysis course, hammers are one of the most efficient ways of identifying sharp turnarounds in the market. And certainly it’s followed through with that because we’re getting a sharp turnaround on the Shanghai. You’re, I’m gonna scroll down a bit. You know, there are some other signs such as, you know, possibly oversold, like just getting into that oversold level for Stochastics, which is very quick indicator. RSI definitely went oversold. It seems to be rebounding and MACD may be on the point of hooking up. Here’s the thing. If you want a big rally then what you really need to see, now this breakout differs, but you know, if you see a strong sell off, now this was a major strong sell off in 2008, because everything was crashing then.


But you know, you get very deep levels of these momentum indicators and you can see MACD did a giant deep selloff and then a rebound. So the momentum was even on the long term indicator, the midterm indicator and the short-term indicator were all, you know, deeply oversold and hooking up. That’s not really the situation here. It did get pretty oversold. MACD hasn’t yet hooked up, but it got oversold, but it didn’t get like Uber oversold like it has say even in 2016. All right. So my suggestion is that, yes, we’ll get a rebound on the Shanghai. How high? Well, you know it’s a hard guess because sometimes you get, you know, a nice rebound from oversold levels like here and or here, and you get very small rebounds, you know, sometimes it might, you might get to the top of that trading range.


So my suggestion is it might get to 3,600 again from 3,100. That would be a good return, but maybe not. And that’s the problem that I am contemplating as to whether it’s worthy of going in on a trade based on the risk reward. Because, as you can see, I didn’t draw the line here, but there’s a fair amount of support down here around 2,600. Well, that’s your potential risk if you were to hold it and not have a stop loss and maybe go on vacation and forget about your stocks for a while. This market may fall quite a bit more, or it may rally to as close to 3,600 as you could imagine. So I’m not sure that the risk reward on this trade, even though it is likely to rally, I’m not sure if it will be all that rewarding.


So I took a look. I could pull this up, I guess, but I looked at the technology stocks, I’m sorry I am going to have to bend down here like KWEB, which is the largest internet stock ETF for the Chinese market. And it’s an ETF and you can see it’s back down to old support levels although possibly breaking. It’s just been smashed. And again, maybe there’s some opportunity here. Some of those indicators that we were just looking at did get oversold, MACD looks like it went pretty deep, but you know, again, your reward is maybe $35. The ETF is trading at 27. That’s not a bad reward scenario. It’s just more of a play. I guess what I am suggesting is that this whole arena is more of a play on an oversold condition that you might get a bounce on rather than a very high conviction.


What I like to call a high conviction trade. This is not to meet a high conviction trade for those who have the hutzpa, the guts. It could be a good high risk, high reward potential trade, very short term. Things were oversold enough on that market to get a pretty good bump on it in the very near term. I personally, even in our aggressive platform have not entered into that trade for what it’s worth. So I just thought that I would address the question of China today and whether it’s an opportunity. And my answer is no, not for most of us, but if you are an aggressive trader, you might get a pretty good little short term pop based on the momentum indicators and that hammer candle that we saw on the Shanghai. Otherwise, I would suggests that conservative or even mid-level risk tolerant investors avoid the trade, despite the potential short term pop that may be happening right now on the trade. Thanks for watching. And I do hope to be able to post something on the MoneyShow presentation that I do on one of my upcoming blogs. If they don’t record it then, I’ll tell you what, I will do a video and I will actually do my presentation on this video, on the Smart Money, Dumb Money show in another week or so. Thanks for watching and we’ll see you next time.


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