2023-10-27 11:21:13 ET
Summary
- China stocks are showing surprising relative strength amidst the sell-off in U.S. equities.
- We might be looking at a false breakdown in KraneShares China Internet ETF, which could portend an explosive rebound higher.
- Pinduoduo is my focus stock to long within the sector.
Curious relative strength in China stocks
Equity markets have been in a prolonged and painful sell-off, with the S&P 500 ( SPY ) and Nasdaq 100 ( QQQ ) down -10% and -12% respectively.
Prolonged periods of capitulation increases the probability of an explosive counter-rally that catches the market by surprise.
In the last few days, I noticed that China stocks have been showing a surprising bout of relative strength. While US equities have been sliding, this sector has been curiously resilient.
This could mean that if and when risk sentiment is ready to rebound from "fearful" levels, as per the Fear and Greed Index , then China stocks could lead the charge higher.
From false moves come fast moves in opposite direction
The KraneShares CSI China Internet ETF ( KWEB ) broke down from a bearish descending wedge pattern. However, instead of seeing a sharp downward slide, which should be the case, KWEB rallied strongly on 24 October towards the $26.50 pivot. It then spent the next two sessions tightening up around the pivot.
It feels like KWEB could be gearing up for a push higher back into the descending wedge pattern, which could constitute a false breakdown. From false moves come fast moves in the opposite direction - KWEB could go on to at least test the downtrend resistance around $28.
Daily Chart: KWEB
What is impressive about this price action is that while KWEB has been holding up pretty well, the SPY has been making consecutive new lows.
Daily Chart: SPY
On the weekly chart, we can see that KWEB has been basing for close to 1.5 years, which I wrote about in early August . There is a good chance the sector has found a medium-term bottom.
Weekly Chart: KWEB
Within the China technology sector, the leading stock is PDD Holdings Inc. ( PDD ), based on its technical chart. It is trying to break out of a 2-year base and is trading right at its 52-week highs, unlike the majority of the sector. This is a sign of strength.
Weekly Chart: PDD
The strength in China stocks is not limited to the technology sector. Below, we can see the chart of the China A50 index. Prices have broken down from what looks like a multi-month bearish head and shoulders pattern.
However, while US indices have been making consecutive new lows in the past few days, the China A50 index has actually been range bound for almost a week. If it is not going lower under the influence of the bearish pattern, then I think we are going to see at least a retest of the $12,330 pivot.
Daily Chart: China A50
Overall, I think there are early signs that China stocks have hit a near-term bottom. They are showing relative strength against US equities and could outperform the latter when risk sentiment improves.
One stock that has been bucking the equities downtrend is Pinduoduo, which is trading close to 52-week highs and is poised to break out of a 2-year base. This is my focus stock within the sector to long.
For further details see:
China Equities Bottoming Ahead Of U.S. Equities (Technical Analysis)