Investment Capitalist

Since we’re on the topic of Chinese stocks, I wanted to bring attention to another one of my favorite Chinese high flyers, Sohu.com. This chart illustrates the rapid surge from mid-August that carried the stock for a 50% run in approx. seven weeks. The horizontal Fibonacci lines are projections made from the initial April breakout near $22 that topped out around July 4 near $35. The multi-day distribution near the top Fib line indicates a short-term reversal has confirmed.

 

But notice the middle oscillator shows good general bid support as the new low in the stock is not accompanied by a new low in the oscillator and the lower oscillators are quickly approaching the lower oversold boundary. The rise in volume on Friday’s break is a warning not to try to catch this too early. There is a convergence of key support levels around $35. The trade appears to be to slowly build a small initial line near $35 and once that level is confirmed, to continue building. A break below the red moving average (200-day EMA) would be the stop but also a more conservative level to take an initial line in this Chinese stock. There are multiple pivot points where this stock will test the persistence of the bulls. Sohu is definitely not one of those “cheap” Chinese stocks with a PE of almost 70, but it is closely related to the psychology of the market towards Chinese internet stocks. In other words, this is a traders stock with momentum as the key driver. Only averages about 1 million shares which is better than most stocks, but beware of holding Chinese stocks overnight too aggressively in the next few weeks as these are susceptible to big gap down openings.

 

China Southern Airlines (NYSE: ZNH) is experiencing blistering growth as that nation’s middle class are coming out in force and spending their newfound wealth. I have a rule to only buy Chinese stocks into weakness or big opening downside gaps that are due to overnight activity in Chinese stocks. The prior post pertaining to CBAK is a good example when in late July, there was a shakeout before its tremendous 300% surge in two months. China Southern Airlines is very close to triggering a buy signal on one of my favorite models. A break above $78 would trigger the buy but what I like to do with these Chinese stocks is anticipate or trade ahead of the signal with a small initial line using a near by major moving average as my entry and stop. In this case, I would be buying around $66-$67 with a stop below $65. Then I would begin adding if I notice momentum building up. Remember, this is the tail end of a pullback that started in mid September near $100, so it’s pulled back 35% already and is building a base for the next possible leg up. My projection work implies a first target at $102 and then $132. I love it when my indicators begin lining up to create multiple indications for a trade entry. With Chinese stocks, take an edge wherever you can get it.

 

Let’s revisit CBAK since our post from last week suggested an anticipation of a pullback in this Chinese stock to below $6 where it would provide a great entry opportunity. China Bak Battery touched $6 on Friday and there is a very juicy level of support convergence between $5 and $5.40. I imagine there will be a spike in activity at those levels and if the stock does show a bounce with even the slightest uptick in volume, the top oscillator will trigger a buy signal.

The top oscillator is my version of the Polarized Fractal Efficiency. Another key point is that this 33% sharp pullback has been accompanied with lethargic volume and that big gap from the September parabolic move is about to close if this nosedive continues, thus putting this Chinese stock deep into oversold territories. Again, because of limited liquidity, this stock is volatile so ideal for trading but is also a risky stock for non experienced traders. Be careful and check out the data.

A major source of underlying bid support has to do with the fact that this stock is not widely owned institutionally, having recently broken above the $5 level and breaking the $100mm market capitalization mark with that September surge. The wonderful thing about these Chinese stocks like CBAK, SVA and ZNH is that they are making money with major earnings growth momentum. So don’t be discouraged by a PE of 50 from a trading perspective.