With the most speculative and beaten-down areas taking on new leadership roles, it’s tough to imagine China will sit out this rally.
Just about two months ago, Chinese indexes and individual stocks registered some of their best performances ever on a short-term basis.
We call these signals momentum thrusts, often marking the initiation of new uptrends.
And a new uptrend is exactly what we think is coming for China following the recent corrective action.
We’re going to outline a handful of trade ideas for this theme today and you can pick and choose and position size accordingly based on how much exposure you want.
As for me, I’m putting on full positions for all of them and planning to add more China exposure soon.
We like the idea of gaining exposure via an index ETF as this will spread our risk across a basket of Chinese equities. This is a hedge against picking the right theme, but wrong vehicle.
On top of our index position, we’re going to put trades on a long-term leader, betting on a resurgence in strength, as well as a long-term laggard, betting on a big catch-up rally.
Once these stocks stop correcting and catch a bid, we’re looking for that momentum from a few months back to return in a big way. In fact, it looks like it could be starting now. A couple of green candles should be all we need to sell some doubles.
This is what we’re doing:
We're buying the $FXI 2/21 $33 calls for $0.63 - $0.70 per contract.
In early October, the iShares China Large-Cap ETF $FXI posted its best week ever as it tried to emerge from a multi-year base.
The corrective wave that has followed brings us right to the 62% retracement of the rally off the August lows. This is a steep yet standard pullback, and it leaves no damage to the underlying trend.
With our volatility squeeze indicator crossing higher, indicating an expansion phase, we want to be long FXI for the ensuing move.
Next, we're buying the $TAL 2/21 $13 calls for $0.35 per contract.
TAL has been a leader for China this cycle but has been churning in a range for the last 12 months.
The breakdown level of this range coincides with major gap support from 2021, as well as a key high from late 2022. It’s also where the VWAP from all-time highs comes into play.
If this is a new bull market for China, TAL shouldn’t just hold this level, it should see a nice rebound rally off of it.
Last but not least, we're buying the $JD 1/17 $40 calls for $1.50 - $1.60 per contract.
Like the others, JD is trying to come out of a base as it tests a multi-year polarity zone around the 62% retracement level.
The VWAP from the 2023 high also coincides with this potential support zone.
With our volatility squeeze indicator suggesting an expansion is underway, we want to lean in the direction of the underlying trend and anticipate a fresh leg higher.
