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Two out of three ain’t bad; more on Chinese shares

June 8, 2022

I have been considering my new 3B trading rule (buy when a downtrend line is broken, when there is a golden cross on the moving averages and when the Coppock indicator turns higher) and I think it may be too demanding, especially when Coppock has had a long swing downwards and is clearly flattening out. I think in those circumstances it is usually going to be safe to buy when two of my three buying indicators turn positive. Most likely this will happen, as illustrated in the Futu chart above, when the trend line has been broken and the moving averages have completed a golden cross but the Coppock indicator is not yet heading higher.

The risk here is that if we do this early in the month, like now, the moving average signal may be reversed since what the chart is doing is calculating the trends based on today’s price but the numbers will keep changing until the end of the month. This is why I base my buy on a green strategy on the May candlestick because we know that is green whereas the June candlestick could end the month red if prices reverse sharply.

These are the sort of reasons why I say that it is easy to read the signals with 20:20 hindsight but harder in real time. However my best guess is that Futu is going to end up giving a 3B buy signal and that the shares are worth buying. Virtually all the Chinese shares that I follow in the QV table seem to be building bases and giving at least one or two out of three buy signals.

Below I show the chart of Meituan.

Like Futu there is a strong likelihood that we are going to see a two out of three buy signal and the Coppock indicator, which has been falling since 2021, is very close to turning higher. By any standards Chinese technology shares have had a full scale bear market with massive declines since the early part of 2021. Growth has slowed but these companies remain in good shape and the power of the economy they are addressing is immense. It is easy to see that as China comes out of its latest lockdowns and resumes its spectacular economic progress that all these Chinese companies are going to do well and may experience re-accelerating growth.

I have been personally buying Chinese shares. The ones I have bought are BiliBili, Futu Holdings, Meituan, Pindudoduo, Nio and UP Fintech which is another stock broking/ wealth management type of business like Futu. The Pinduoduo chart also shows a 2/3 buy signal and a Coppock curve which is flattening out after a 16-month decline.

Recent trading looks very like a reversal. We have candlesticks with long tails and short bars at the top which is classic reversal behaviour. We have two solid looking green candlesticks after a period dominated by mostly red candlesticks. We have a broken trend line and a golden cross on the moving averages and the Coppock looks on the brink of turning higher.

If it does I have noticed something very interesting about the way it behaves. It doesn’t come with an absolute guarantee but it is very unusual to see any share price falling significantly while the Coppock line is rising. What this means is that as long as Coppock is heading higher, as it was for Meituan between May 2020 and March 2021, you can hold your shares with great confidence.

As you can imagine this is a hugely valuable thing to know. If Coppock is rising you hang on in there. If Coppock starts falling you don’t need to sell immediately but the risks of holding have increased and you should be looking to act if another of my sell signals is triggered such as a broken uptrend line and/ or a dead cross on the moving averages.

If you are making very large profits you might even consider selling if the shares spike higher and become very overbought. This knowledge that when Coppock is rising the shares most likely won’t fall is particularly valuable if you are trading like me using leverage.

Other Chinese shares are not quite as strong but still looking interesting. We can look at BiliBili which like the other companies considered here would be classic 3G with a rising share price. Again we see the candlesticks with the long tails and there is a good chance that June is going produce a green candlestick after a string of reds. This will be affected by the Q1 2022 results due to be reported tomorrow but my guess is that as long as these are broadly positive the shares will respond well. We have a Coppock line which has been falling for 16 months and seems to be flattening out. It may also be significant that like other Chinese shares BiliBili had a spectacular run up between February 2020 and February 2021 and then lost all those gains in the price collapse that followed. The shares look a good bet which is why I have bought some.

Another interesting one is UP Fintech Holdings, which was slaughtered in the bear market. The shares fell from a February 2021 peak of $35 to a March 2022 low of $2.68, a decline of 92pc. No doubt they rose way too high but they are surely a lot more reasonably valued now. There is no golden cross or rising Coppock curve but to the naked eye they seem to be building a base which could support a useful rise.

I am also wondering if the behaviour of these stocks tells us something about the gambling-mad Chinese investors. On the way up they all pile in like crazy and load up with margin debt and then react similarly violently on the way down. This may be a politically incorrect and totally wrong observation but the share price behaviour does make you wonder. Like Futu and other Chinese companies the last report we had from UP Fintech showed plenty of growth and great optimism on the outlook and the opportunity. They are due to report on 10 June when we will learn more.

Also looking promising is Pinduoduo where we have the makings of a golden cross on the moving averages and a broken downtrend line. Coppock has not yet turned higher but has flattened out after a sharp decline and looks promising. Pinduoduo is another exciting Chinese e-commerce business which is fast catching up withe commerce giant Alibaba and has a large agricommerce business helping Chinese farmers sell their products online.

Last of the Chinese shares I want to look at here is electric car business, Nio. Again the Coppock curve has been falling since February 2021 showing how much these shares move as a group. The chart looks as though it could be on the turn and Coppock looks poised to turn higher have dropped from plus 2,820 to minus 118. The company is due to report on 9 June so we will know more about what is happening but so far investors have been impressed by what they are hearing from the Chinese companies which have reported.

Growth had been slowing during the year but bloggers are raving about their ET7 luxury sedan with a range of 600 miles, which is to be released in Germany as well as China where they will be up against the world’s most highly regarded luxury cars. It is incredible how far Nio has come since nearly going bankrupt two years ago so full marks for excitement. These are their plans for this year.

2022 is a year for NIO to press ahead at full speed. We will deliver three new products, continue to invest in R&D and infrastructure to improve our long-term competitiveness, expand our production capacity to meet the faster-growing usage demand, and serve users in more countries and regions.”

I have decided I am going to recommend all these shares.

BiliBili BILI. Buy @ $28.03

Futu Holdings. FUTU. Buy @ $46.68

Meituan 3690. Buy @ HK$208.2

Nio. NIO. Buy @ $19.65

Pinduoduo. PDD. Buy @ $59.19

UP Fintech Holdings. TIGR. Buy @ $5.19

I don’t want to be too cautious with these Chinese stocks so I am diving in with full recommendations after my earlier piece about Chinese shares showing signs of turning higher. Investment is about risk so it makes sense to take some. I buy all these shares in a spread betting account with maximum leverage but that is just the way I like to invest. It has the advantage that it amplifies your gains and can generate money to invest in more shares without the addition of extra cash if things go well. Obviously that comes with higher risk but I am hoping that my trading strategy will help me to control that and benefit from the gains while avoiding any substantial downturn.

An exciting possibility is that in the same way as Chinese shares led on the way down, topping out in February 2021 when the Nasdaq 100 didn’t top out until November 2021 maybe they are going to play a lead role on the way back up. We shall see.

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