Chinese Stocks in a Trade War: JD.Com and Weibo

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Are Chinese stocks the friend or foe of investors in today’s increasingly hostile macroeconomic climate? Politics aside, when it comes to buying or shorting China-based tech stocks JD.com (NASDAQ:JD) and Weibo Corporation (NASDAQ:WB), it may be one or the other.

In order to build a more robust risk-adjusted investment, this strategist believes the price chart and options market are the tools of choice for investors. As much, let’s examine both for JD and WB within an ongoing trade war between bears and bulls in Chinese stocks, come up with our own trade agreement and offer a well-suited options strategy that aligns itself with our technical outlook.

Chinese Stock Pairs Trade Short: JD

Along with Alibaba (NYSE:BABA), JD is a Chinese stock whose retail business model resembles e-commerce tech giant Amazon.com (NASDAQ:AMZN). On the price chart though, there’s less of a relationship with AMZN stock. The fact is JD shares have been in a tense standoff between bears and bulls for the past year. And now it appears the bears may have the upper hand.

During this period, JD has been wrestling with its prior all-time-highs from 2015. The battle has developed into price action resembling a head and shoulders topping pattern. That’s bearish. Ultimately, shares of this Chinese stock will need to break neckline support to confirm aggressively lower prices.

So far, the 38% and 50% retracement levels have contained the formation, but it doesn’t look good for bulls. The latest weekly candle, a bearish engulfing formation and supportive stochastics set up suggest a right shoulder is in place, offering an entry point for bears to exploit future weakness in JD as shares breakdown.

Source: Charts by TradingView

JD Stock Options Strategy

Reviewing the options market for this Chinese stock, the Sep $37/$33 put spread is favored. With shares of JD at $38.27 the vertical is priced for $1.08. This limits risk over the next couple months to less than 3% of shorting shares while having an earnings catalyst built into the contract.

If shares of JD.com were to fail the bearish pattern and move through the recent shoulder pivot, I’d personally look to exit the position for a smaller loss.

Alternatively, if this Chinese stock confirms our technical outlook and JD moves into or breaks below the neckline, this trade stands to make $2.92 or 270% if the price is below $33 at expiration. However, locking in profits or adjusting into a butterfly for a credit looks like a smart way to manage risk over the life of the position.

Chinese Stock Pairs Trade Long: WB

Politics aside, Weibo, a social media Chinese stock that’s been hailed as China’s Twitter (NYSE:TWTR) or a hybrid of that platform and Facebook (NASDAQ:FB), is one to “like” in today’s market. Technically, over the past few months, shares of WB have corrected down into a key support zone comprised of a long-term uptrend line and the 38% retracement level.

Secondly, the steep but healthy pullback from WB’s all-time-highs is also backed by a fairly constructive oversold stochastics picture on the weekly chart. And with this past week’s candlestick confirmation of a low in place, it’s time to go long this Chinese stock.

Source: Charts by TradingView

 WB Stock Options Strategy

Reviewing the options for WB stock, the Oct $100/$115 call spread looks attractive. With shares of WB at $90.67 this vertical trades for $3. Similar to JD, this spread combination sets the investor’s exposure to just over 3% of WB. In this instance of course, we’re bullish and would otherwise be buying shares outright with the possibility of much larger downside risk.

Of course, if shares of this Chinese stock further confirm the technical low and rally from here, this currently out-of-the-money spread could quickly go in-the-money. And if it takes a bit longer? With a holding period into October, a massive 400% return on investment or readily available opportunities to lock in profits along the way, looks very promising.

Investment accounts under Christopher Tyler’s management currently own positions in AMD stock and / or AMD derivatives, but no other securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.


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The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.


Article printed from InvestorPlace Media, https://investorplace.com/2018/07/chinese-stocks-in-a-trade-war-jd-com-and-weibo/.

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