While stock markets were rallying hard on Wednesday, Chinese stocks fell into a hole on a U.S. legislative headline.
The Senate passed a bill to de-list Chinese companies from U.S. stock exchanges if they cannot be more transparent. So far, this is a mere headline and still needs to go through the rest of the legal procedures. And it will take time because it is not usually a fast process for bills to become law. The companies we are discussing today are not likely the reason for this initiative. It is more likely to dissuade new comers to prevent another Luckin (NASDAQ:LK). Coincidentally or not, though, LK stock resumed trading yesterday after weeks of being in the penalty box.
It will be political football going into the election, but the fans and haters of Chinese stocks are dedicated to their cause. Overall, the fundamentals behind these three stocks are solid — and they should also have the tailwind from the fact that China reopened its country to business first. The recovery process is ongoing already, and the government will most likely do all it can to help them along.
Meanwhile, nearly all U.S. states have started some sort of reopening process. And as long as there isn’t a large set-back with the infection rates, the good news will gain momentum. The government is pouring untold sums of money at the problem to jump-start work. The White House is supporting the people and the Fed is keeping financial sectors awash with cash. In fact, Federal Reserve Chairman Jerome Powell is taking great risk with this experimental bailout and only time will tell if he is a genius or a mad man.
In the mean time, there are lines to trade on these three Chinese stocks. And all three are under pressure Thursday morning as the new headline is still fresh on the ticker tapes. That said, here they are:
So, with all of that in mind, let’s dive in.
Chinese Stocks to Trade: iShares China Large-Cap ETF (FXI)
Click to Enlarge
The problem here is FXI stock has not recovered its 2018 highs. The long-term chart shows that they have failed near $52 three times. So clearly, there is big resistance there. Additionally, the struggle over this level is over 12 years old, as the bulls and bears began that battle in the middle of 2007. The good news, though, is that tough resistance zones like this make for great eventual spring boards to new highs.
For the same reasons but on the opposite side of the spectrum, FXI stock should have strong support below — and this usually gives the bulls an advantage. Knowing that the downside potential is limited gives the buyers the conviction they need to try one more time to take out $52. However, there are lower resistance levels to deal with first, starting with $45 per share. This marks the most recent failure point in January, as Chinese stocks started their novel coronavirus correction earlier than the U.S. markets did.
Therefore, for the next few months, I expect the bottom near $32 per share to hold and for the FXI to rally. There will be several fades along the way, but the result should be another attempt at a major breakout. This is where selling bullish put spreads and buying shares or calls in FXI make sense. The caveat, however, is that the rhetoric over the transparency issue doesn’t morph into another trade war face-off. There is a chance that President Donald Trump uses it as part of his campaign, but the odds favor the bulls.
Alibaba (BABA)
Click to Enlarge
Collectively, this is still the golden child of the Chinese stocks. It has no apparent marks against it, and the Congress efforts are surely not to straighten Alibaba out. Proof is that it trades like a domestic company. Wall Street has complete faith in its operations, so it is not a coincidence that BABA stock is above its January 2018 highs already.
Furthermore, there is technical evidence on the daily chart that BABA stock is in a breakout to $230 and beyond. The bulls are in the process of establishing the $215 neckline as support for the rally. This is a process, and it may fail a few times, but the point is that the buyers are in charge of the price action; So they will buy the dips. Short term, the first level of support is at $210 per share. Losing that would fill the gap to $204 but into a support zone, and below that even more buyers will step in.
Clearly, the bears will need new material reasons to break this stock. Maybe the earnings report on Friday will bring them such an opportunity, but I bet the company will report relatively good news or at least in line with expectations. This is the quarter for managements to toss all ills and the kitchen sink into it because they have the cover of the crisis. Assuming a terrible negative reaction and the stock falls 10%, I would be a buyer on the dip.
Pivot zones like this offer strong support, and $190-ish has been in contention since late 2017. If it comes down to it, the battle there will be fierce. I can make the same argument $10 lower as well. This is all to say that investors holding the stock have conviction on their side. The upside opportunity will come from chasing the breakout from the low 220’s.
Baidu (BIDU)
Click to Enlarge
Something is wrong with BIDU stock, and the risk is that there is also something wrong with Baidu.
The fact that it is nearly 60% below its January 2018 highs warrants some caution. Consequently, any bullish position in it is speculative. The size of the trade should be small enough that it would not break the investor heart or piggy bank. Unlike BABA, Baidu’s ties to iQIYI (NASDAQ:IQ) makes it more susceptible to this week’s renewed Chinese stocks scrutiny.
Also, the valuation metrics these days are wonky, as the global shutdown made it so it’s almost impossible to gauge value. I rely on the fact that I know it wasn’t bloated before the quarantine, so I can assume that it will gradually revert to that. Last time I wrote about it, I suggested that investors should book profits near $110 and definitely at $120 per share. The company reported earnings this week, and the BIDU stock popped more than 20% and failed right at $120.
The charts rarely lie because they have no emotions. They indicate where the buyers and sellers are lurking. That said, we know now that sellers are above and there will be buyers at $107, $104 and $100 per share. Investors should hold the stock through tests of these levels because it will likely find support there.
So, which is best today? Also in my last write up I said that BABA was the “healthiest” of the three. Baidu stock is still the underdog for investors who prefer comeback stories, and the FXI is the easiest blanket trade on the Chinese stocks as a unit. Once again, it is important to note that there will be hiccups along the way, but the technical setup loos promising. I will be watching to see if this push for transparency turns into a nationwide hawkish anti-China sentiment. If that happens, I expect tough slog similar but not as bad as what happened with the trade deal.
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. Join his live chat room for free here.
