2024 May Be The Year China’s Sleeping Dragon Awakens (Technical Analysis)

China stocks may be shaping up to be a lockout rally, which is characterised by a strongly uptrending bull market that does not provide low-risk entries for new bulls to get long, and for existing bulls to add on. Thus, the majority are locked out of this opportunity, or end up under-invested.

In this technical analysis piece, I will show why I think China stocks have bottomed out and could see strong double / triple digit returns in the months to come.

Also, I will share my list of focus China stocks, which are building very bullish technical structures.

First, when we look at Hong Kong / China indices, we may observe that the recoveries since their capitulation in February 2024 have been extremely robust, with the majority of these indices even breaking out higher from multi-month downtrends.

Weekly Chart: Hang Seng Index

Weekly Chart: CSI 1000 Index

Weekly Chart: Shanghai Composite

When we look at the KraneShares CSI China Internet ETF (KWEB), it is testing the key breakout pivot of its 1-year base.

Weekly Chart: KWEB

When we look at when these indices / ETFs topped out, the Hang Seng Index did so in January 2018, the CSI 1000 Index did so in June 2015, the Shanghai Composite did so in October 2007, and KWEB did so in February 2021.

Simply put, HK / China has been mired in a multi-year bear market, and no one wants to touch this space.

JPMorgan called China “un-investable” back in March 2022, and short interest in the iShares China Large-Cap ETF (FXI) is close to all-time highs, right when FXI is close to its all-time lows.

Sentiment in China stocks is arguably rock bottom.

Bull markets are typically born on pessimism, and we have just seen sharp recoveries following major capitulation in the indices.

Take the CSI 1000 Index for example, the index collapsed -20% in 6 sessions in February, before recovering all the losses in 10 sessions. The recovery was pretty much V-shaped, and the index has never looked back since.

Daily Chart: CSI 1000 Index

V-shaped recoveries are rare but powerful, as it shows a drastic change in the dynamic between bulls and bears. The bulls have been firmly in control since February’s capitulation event, which has led to indices breaking out of big bases / long-drawn downtrends, as covered earlier.

I do not like to base my investing decisions solely off what hedge funds are doing, but David Tepper of Appaloosa Management has greatly increased his stakes in China stocks during Q1 of 2024.

He more than doubled his positions in Alibaba (BABA), Pinduoduo (PDD Holdings (PDD)), and Baidu (BIDU), at the same time added iShares China Large-Cap ETF, JD.com (JD), and KraneShares CSI China Internet ETF. BABA now makes up his largest position in his portfolio.

Is this an early sign that institutional money from overseas smart money may be coming in?

Even domestically in China, the government is showing signs that it is open to providing liquidity to the markets:

China considers buying unsold homes to protect property market – May 2024

China will begin selling long-term bonds to prop up economy – May 2024

China steps up fiscal spending to support economy – March 2024

China property developers get financing support from government – February 2024

Call it kicking the can down the road if you want, but it is not a doubt that the government is stepping in aggressively to support the economy, especially after troubles surrounding overleveraged property developers culminated in Evergrande being liquidated in January 2024 – the most indebted property developer in the world.

Looking at some of the individual stocks, I am seeing bullish price action and technical structures.

Tencent (OTCPK:TCEHY) – broke out from multi-week downtrend, and now close to testing breakout pivot of huge 2 year base.

Weekly Chart: Tencent

Alibaba – out from multi-week base. Fell after missing earnings, but the 77-78 price support is holding.

Weekly Chart: BABA

JD.com – out from multi-week base in April. Still contending with longer-term downtrend resistance, which I expect will be tested soon.

Weekly Chart: JD

Baidu – basing for 2.5 years.

Weekly Chart: BIDU

Pinduoduo – the leader of the pack; stock has been trending higher while its peers were basing.

Weekly Chart: PDD

Huya (HUYA) – attempting breakout from large 2 year base.

Weekly Chart: HUYA

Looking at the sector ETFs, KraneShares CSI China Internet ETF is testing pivot of its 1-year base.

Weekly Chart: KWEB

iShares China Large-Cap ETF – basing for 2 years, and fast approaching breakout pivot from downtrend resistance.

Weekly Chart: FXI

As China has been massively beaten down, neglected, hated, I think there is huge opportunity for some of these stocks to post triple digit returns.

Looking at even large cap stocks like Tencent, the stock is down close to -43% from its highs, and Alibaba is down -75% from its highs.

To sum up, these are the things going for the China trade:

1. Hated sector – FXI short interest close to all-time highs
2. Massively beaten down – Many large-cap stocks down more than -50% from their highs
3. Capitulation event – Check (in February), which was followed by robust V-shaped recovery
4. Government support – Check
5. Institutional money – Possibly coming in (e.g. David Tepper)

The reward-to-risk ratio to buy China now is tremendously attractive, in my opinion, which I think will pay off well in the next 2-3 years.

The Year of the Dragon 2024 may be the year when the sleeping dragon awakens.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.