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China stocks are on fire, with many stocks breaking out higher from recent consolidation. Some of these stocks have broken out from large, well-defined, lengthy bases, and this provides a robust platform for them to sustain their uptrends from a technical perspective.
Let us look at some of the leading stocks in the sector:
EHang Holdings
EHang Holdings (EH) is a fast-moving small cap stock that pulled back to its 20 day moving average after a strong run up to $17.84. We may observe that the stock went through 3 consecutive days of tightening, where the intraday price ranges on 23, 24 and 25 January got incrementally narrower, and were within the intraday price range on 20 January. This compression in volatility culminated in a breakout higher on 26 January.
Daily Chart: EH
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Hello Group
Hello Group (MOMO) had been seeing tremendous upside momentum, and spent a few days tightening around the 10 and 20 day moving averages. The stock formed a tight flag, and broke out higher on 26 January.
Daily Chart: MOMO
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Pinduoduo
Pinduoduo (PDD) is one of the leading stocks in the space. To appreciate its upside potential, we may observe that the stock has broken out from a multi-month base on the weekly chart. The bigger the base, the higher in space – this stock is likely to see further upside from here.
Weekly Chart: PDD
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Drilling into the daily chart, PDD provided a long entry setup as it spent a few days consolidating in a tight range. The stock put in two tight-ranged bars on 24 and 25 January, and this volatility compression gave way to a breakout higher on 26 January.
Daily Chart: PDD
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Vipshop Holdings
Vipshop Holdings (VIPS) also saw volatility compression as the stock consolidated at the 10 and 20 day moving averages after a strong run up. The stock broke out higher on 26 January, and looks ready for a continuation of its uptrend.
Daily Chart: VIPS
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Tencent Music
Tencent Music (TME) spent a few days consolidating at the 10 and 20 day moving averages, and built a tight-looking flag. The stock broke out higher on 26 January.
Daily Chart: TME
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iQIYI
iQIYI (IQ) tightened up for a few days before breaking out higher on 26 January. The long setup was not as strong as the previous candidates; nevertheless, the sector was breaking out and IQ was lifted higher too.
Daily Chart: IQ
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Bilibili
Bilibili (BILI) broke out from consolidation as well. We may observe the stock tightening up in similar fashion prior to the breakout.
Daily Chart: BILI
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KraneShares China Internet ETF
The sector ETF for China technology stocks (KWEB) also broke out higher from consolidation.
Daily Chart: KWEB
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To appreciate the full significance of the breakout higher in KWEB, we look at the weekly chart, where the sector ETF is now breaking out higher from a multi-month base. This is price action that is typically seen in a market bottoming phase.
Weekly Chart: KWEB
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Conclusion
I have written previously on the likely scenario that China stocks were in the process of bottoming out. Based on the recent price action, this adds further credence to this view.
Many leading stocks within the sector are now transitioning from the bottoming phase to an uptrending phase, which is where the bulk of a stock’s price gains are made. Uptrends can last for a long time and can be very powerful, particularly for sectors that are especially bombed out.
I remain bullish on China stocks, and am holding long positions in EH, MOMO, PDD, VIPS and RLX. I aim to add on exposure to the sector.
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.
