2023-07-28 11:04:05 ET
Summary
- China stocks are showing bullish price action and relative strength, and are poised to break out higher.
- Hong Kong and China indices have broken out of multi-month downtrends and are trading above key moving averages.
- Individual China ADRs, such as Alibaba and China EV stocks, have also broken out of big bases and are showing high upside momentum.
Big bullish price action clues in HK/China stocks
Each pullback within an uptrending bull market creates an opportunity to identify the next sectors and stocks that will lead the broad market higher.
First off, equity markets have been uptrending since March for a few months now. Indices and leading stocks are also trading above their key moving averages, so I would like to establish that we are still in a bull market, despite the recent pullback.
Things can, of course, change very quickly, but right now, my bias is to find sectors and stocks to buy. It has come to my attention that China stocks are basing really well. They showed high relative strength during the recent broad market pullback, and I believe they are poised to breakout higher.
When the broad market is ready to resume its uptrend, China stocks are likely to lead in terms of momentum and gains.
This is how I came to that conclusion:
HK/China indices breaking out
For starters, US indices sold off aggressively to high volume the day after FOMC (27 July), as they pushed higher at the start of the session before closing the session red.
The next day on 28 July, notice how Hong Kong and China indices shrugged off the overnight weakness to push to new swing highs. The Hang Seng raced towards its multi-month downtrend resistance and broke above its 200-day moving average.
Daily Chart: Hang Seng (HK50) Futures
The China A50 did one better - it had already broken above its multi-month downtrend resistance a few days back. The index now broke above its 13,000 pivot, taking it out of a mini base.
Daily Chart: China A50 Futures
Both indices look set to close the session more than +3% higher, which is a big green flag for risk sentiment, given the brutal overnight selling in US indices.
China ADRs breaking out of big bases
Now, we look at individual ADRs listed in the US.
Alibaba
The key leader to watch is Alibaba ( BABA ). This stock had been plagued by regulatory woes surrounding Ant Financial Group, but recent price action shows that these concerns are behind the company.
On 7 July, PBOC fined BABA on Ant Financial Group's regulatory violations. The stock jumped +8% in response on high volume, telling me that the market believes that the fine puts to bed this months-long saga. On 24 July, BABA chose to maintain its 33% in Ant Financial Group instead of reducing its stake, and the stock rose +4.5%.
BABA has now broken out of a 3-month base, and is trading above its key moving averages (10, 20, 50, 200 day). I believe BABA is the main indicator on whether China stocks are ready to breakout higher. For now, the answer is yes.
Daily Chart: BABA
China EV stocks
The China EV sector is hot - stocks like XPeng ( XPEV ), Nio ( NIO ) and Li Auto ( LI ) are leading China stocks. They have already embarked on powerful uptrends, and were generally unperturbed by the volatile action in the US.
XPEV recently benefited from an investment from Volkswagen ( OTCPK:VWAGY ) ( OTCPK:VLKAF ) ( OTCPK:VWAPY ).
Daily Chart: XPEV
Strong uptrending action from NIO.
Daily Chart: NIO
Resilient uptrending price action in LI.
Daily Chart: LI
All three China EV stocks have broken out of massive bases, which is a sign that they have turned the corner.
Other leading China stocks
Aside from the EV sector, many other stocks (majority technology / software) have also broken out of big bases. As the saying goes "the larger the base, the higher in space".
Pinduoduo ( PDD ) - broke out of a big multi-month base, supported by better than expected earnings.
Daily Chart: PDD
MINISO Group ( MNSO ) - Retailer stock, that broke out of a big multi-month base and showing high relative strength.
Daily Chart: MNSO
Baidu ( BIDU ) - A little bit of volatility and chop on the daily chart, but we may observe from the weekly chart below that this large-cap technology stock has been building a base since August 2021. Any breakout would be very powerful.
Weekly Chart: BIDU
EHang ( EH ) - EVTOL stock, that has been trending higher. Very high short interest at 22% float. Stock has broken out of a big base.
Daily Chart: EH
Overall, rotation is the lifeblood of a bull market. As long as the uptrend in the bull market remains intact, the higher probability trade is to go long.
We can see different sectors taking turns to lead the markets higher - first it was FAANG stocks ( FNGU ), followed by semiconductor ( SMH ) and AI stocks. For the past few days, cyclicals like oil & gas ( XOP ) ( OIH ) ( XLE ) and banks ( XLF ) ( KRE ) have done well. Now, it looks like China stocks are ready to turn the corner and breakout higher.
For further details see:
China Stocks Have Turned The Corner, Big Breakout Imminent (Technical Analysis)