Is It Time to Buy China Stocks?

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Many Chinese stocks trading on the U.S. exchanges are holding up better than local issues, highlighting a potential buying opportunity in coming weeks. This resilience makes sense when looking at the Asian nation’s coronavirus outbreak numbers, in which new infections have crashed since mid-February. Recoveries have been picking up steam at the same time, raising hopes that China’s version of the crisis has run its course.

In China, 62,375 victims have recovered out of a total 80,735 cases, according to Johns Hopkins University statistics. The Chinese government is working swiftly to bring disrupted services online and get the country back in the business of producing goods and services. Meanwhile, warm spring weather is just around the corner, with both elements suggesting that China has found the light at the end of the tunnel. If so, China stocks could bounce strongly, even if infection numbers in Western nations continue to grow. 

Alibaba Group Holding Limited (BABA) topped out at $212 in June 2018 after a long-term uptrend and sold off for the rest of the year, bottoming out near $150 in late December. The 2019 recovery wave stalled about 15 points below resistance in May, while a year-end rally completed the round trip. A January breakout ran into a buzzsaw of selling pressure, reversing at $231 and easing into a shallow correction that is still holding support at the 200-day exponential moving average (EMA).

The stock could hit that magic level as early as Monday’s session, setting up an important test of strength. Several weeks of price action around the moving average may be needed to determine the outcome, with a strong bounce raising the odds for a successful breakout into the $250s. However, there’s no rush to own the stock until the bounce gets underway because getting it wrong could do major damage to your investment or trading account.

Nasdaq 100 component, Inc. (JD) rallied strongly after the Brexit vote in 2016, lifting from the upper teens into the August 2017 high at $48.99. It failed a January 2018 breakout attempt after posting an all-time high at $50.68, entering a correction that completed a double top breakdown after selling off through $36 in August 2018. The decline found support within 30 cents of the 2016 low in November 2018, ahead of a 2019 bounce that mounted resistance at year end.

The stock rallied to a 21-month high last week and pulled back. It is filling the March 2 gap this morning, with strong support at the 50-day EMA located around the same price level. A breakdown could be more fulfilling than a quick bounce with this price structure because even stronger support between $35 and $36 would offer a more potent reward-to-risk profile for pullback trades.

Vipshop Holdings Limited (VIPS) posted an all-time high at $30.72 in April 2015 and entered a persistent downtrend that finally bounced at $7.80 in October 2017. The recovery wave stalled in the upper teens about three months later, reinforcing range resistance posted in August 2016. The subsequent downturn broke 2017 support in the second half of 2018, descending to a five-year low at $5.30 in November.

The stock remounted broken support in August 2019 and turned higher into January 2020, posting a 52-week high. It sold off with world markets into the end of February and bounced sharply, gapping up to the highest high since April 2018 last week. It is now pulling back and could fill the recent breakout gap, setting up a potential low-risk buying opportunity, ahead of a 100% retracement into the 2018 high at $19.14.

The Bottom Line

A handful of Chinese stocks are bucking the downward tide, gaining ground despite the growing coronavirus infection. These issues could emerge as market leaders as the infection in that country continues to contract and lives return to normal.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

Source: Investopedia

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