After lagging their U.S. counterparts for much of the market recovery, Chinese stocks are starting to play catch up. The past three trading sessions have seen the entire emerging markets complex awake in a big way. Angst over U.S.-China relations seems to have eased after President Donald Trump’s comments during last Friday’s press conference proved more dovish than traders expected.
Moreover, here’s your stat of the day to back up the bullish bias on the iShares MSCI Emerging Markets ETF (NYSEARCA:EEM), which includes the top Chinese stocks among its largest weightings. It was tweeted out by @sentimentrader Tuesday afternoon:
“The emerging markets fund $EEM has been up at least 1.7% for 3 straight days. It’s done this 5 times since inception. Two months later, it was higher all 5 times averaging a whopping 13.6%.”
At the same time, the iShares China Large-Cap ETF (NYSEARCA:FXI) just closed above its 200-day moving average for the first time since mid-February. So, with all of that in mind, here are three of my favorite tickers for capitalizing on the newfound strength:
Let’s take a closer look at the price action in each, and build out some trade ideas.
Chinese Stocks to Trade: Alibaba (BABA)
Alibaba’s breakout was cut short last month after earnings torpedoed the stock. But the sinking didn’t last long. Two of the past three sessions have seen huge green candles, confirming buyers are returning in a big way. Heavy volume accompanied the surge, with Friday’s rally seeing over 43 million shares traded. It was the second most active trading session of the year.
Both the 20-day and 50-day moving averages are curling higher this week to confirm buyers have wrested back control of the short- and intermediate-term trends.
With earnings now in the rear-view mirror, implied volatility has returned to lower levels. Options premiums are now cheap, so bull call spreads aren’t a bad way to go if you think the strength continues.
The Trade: Buy the Aug. $220/$230 bull call spread for around $3.70.
Baidu hasn’t fared nearly as well as Alibaba in recent years. Known as the “Google of China,” Baidu has seen its share price drop nearly 60% from 2018’s highs. The few rebound attempts along the way were feeble and ultimately failed. And although the weekly chart needs time to heal before turning higher, the daily chart is giving some signs of optimism.
In mid-March, we saw a massive four-day climb that sent the stock up as much as 20%. The pullback we’ve seen since has thus far held the rising 20-day and 50-day moving averages. Though the past three sessions haven’t proven as explosive as BABA, if traders continue to chase Chinese stocks, it should provide a tailwind to BIDU.
The implied volatility setup is mirroring BABA, making bull call spreads an obvious choice. That said, watch for a break above $109 before pulling the trigger.
The Trade: Buy the Aug. $110/$120 bull call spread for around $3.50.
Emerging Markets ETF (EEM)
Instead of playing Chinese stocks directly, or even playing the go-to China ETF — FXI — you could take the more diversified bet and trade the whole emerging markets space via EEM. It avoids the risk that you pick the one stock that doesn’t rise with its sector, or country, in this case.
Plus, I really like the bullish stat mentioned in the intro and want to have some exposure if this sixth signal follows in the footsteps of the prior five.
From a charting perspective, EEM looks excellent. The 200-day moving average does loom overhead and could provide some resistance. However, ultimately, I think the uptrend that’s been in place since March will prevail. Since EEM is a slower-moving fund, I like the idea of a higher probability cash flow play over a more directional one. With a price tag of $40, the margin required for selling puts is minimal.
The Trade: Sell the July $37 naked puts for around 65 cents.
For a free trial to the best trading community on the planet and Tyler’s current home, click here! As of this writing, Tyler held bullish positions in EEM.