iQiyi (NASDAQ:IQ) is a Chinese company that most refer to as the Netflix (NASDAQ:NFLX) of China. It had an amazing start out of the gates in the first half of 2018, but then it crashed hard into the end of the year.
IQ stock fell almost 70% from the June highs to the December lows. However, most of the damage was not earned. It and most other Chinese stocks took a beating while stuck in the line of fire of the tariff war. The whole stock market was also stuck there too but some stocks, even some U.S. stocks, suffered more than the averages.
They say that they don’t ring bells at inflection points, but Christmas bells may have announced the bottom for iQiyi stock.
The charts usually signal a strong base when the stocks reject bottom levels then start setting higher lows and higher highs. Last week, IQ had an incredible rally off the earnings event, so this brings the fundamentals and technicals together to fuel the rally off the lows. The bears are clearly at a disadvantage without new bad headlines. Usually sellers chase stocks showing cracks and this one is firing on all cylinders.
Fundamentally, IQ is a spinoff from Baidu (NASDAQ:BIDU) so it’s probably well funded. But value, much like with NFLX, is in the eye of the beholder. The exuberance such stocks is their potential a few years from now.
If I am long IQ stock then I stay in it. But this being a momentum stock, it never leaves easy entry points for new investors. Those who want to be long it for the long term they don’t need to nail the perfect entry point. Luckily, we have charts that we can use and there is a lot of information to guide traders.
But for more active traders, they need to use the technicals to be surgical hunting the short term profits. I am honest enough to admit that I missed the easy money from last week. This morning the tariff headline is adding to the greens.
Since the December bottom, IQ has rallied 90%, so clearly it would be reckless to just buy it. Especially consider that last October, it had a major ledge from which it started the fall to its worst days. Pivot points this decisive usually are resistance on the way up. Furthermore, about a month prior to that, IQ had another major island top from a level slightly higher than the October fail so clearly the bulls lost major battles between August and October.
Having said that, this week the news from the U.S.-China tariffs is helping the bulls and the stock is trading higher again. The general stock market move is also a tailwind for IQ. The short sellers are on the run and buying begets more buying.
Above $31.10 and $32.50 per share, IQ will invite more momentum buyers, so those could be entry points for a fast traders. But those are probably also exit point for those already long the stock from much lower prices. As it approaches $34 per share the resistance will be much stronger and at $38 the rally will be really long in the tooth.
Conversely, the prior necklines that the IQ bulls just took now become support zones. So on the way down, I would look for $22 per share area to be strong support. If I sell a naked put to generate income I would hide at or below it. The Friday earnings candle was so large that it makes it hard to find other meaningful levels. $23.25 is also another tentative mini support level.
The bottom line is that IQ is a decent long-term growth bet with short term potential. But it is not an easy short-term trade. On the way up it looks like it has gone too far too fast. While on the way down it looks like it’s headed to zero.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.
