Is It The Right Time to Buy China ETF?
Chinese stocks were beaten to the ground in 2021. Is it the right time to buy China ETF?
In this article, I will be exploring one of the top ETFs to cover the China stock market (MCHI). The iShares MSCI China ETF (MCHI) seeks to track the investment results of an index composed of Chinese equities available to international investors. As per the iShares ETF investment objective, MCHI offers:
1. Exposure to large and mid-sized companies in China
2. Targeted access to the Chinese stock market
3. Use to express a single country view
The Chinese stocks crashed during the COVID-19 in March 2020. The MCHI ETF reached as low as $49. After the crash, in about 230 trading days, MCHI went to an all-time high of $96 — returning almost 100%.
From its all-time high of $96, the MCHI crashed by about 55% due to various reasons but not limited to: Ant financial IPO pull-off, tech sector & educational sector crackdown, DiDi, along with de-listing concerns from the US stock exchanges.
Before moving further, note that this analysis and write-up are purely based on technical analysis. There is no consideration given to:
- The GDP and growth prospectus of China
- The current COVID situation
- Other macro and micro factors within and outside of China (including sanctions)
Disclaimer: This is not a buy/sell recommendation and is shared for information & knowledge only. The author is not a professional (or) qualified investor, and the articles are not investment advice or a recommendation or advice of any sort. All the analysis/data are from the public domain, like, but not limited to, Yahoo Finance, Google Finance, and Investing.com. Consult your financial planner for any investing decisions. This article is not a paid promotion, and the expression in this article is solely the author’s research & analysis. While anyone can give a stock “BUY” recommendation, investors must have a strategy and know when to “SELL” a position. Do your due diligence before trade execution, and everything is at your own risk.
With that being said, let’s jump to address the question,
Is It The Right Time to Buy MCHI ETF?
On the monthly chart, MCHI is resting on strong support at $50
Let’s check the support validity in the weekly charts — that confirms the strong support at $50.
Thus, the first important point is to continue observing the stock price at around $50 for price action. If the price bounces off, it confirms the support. Ideally, there could be many such bounces; if not, the stock price could break below $50.
The second important point is to observe the volume/accumulation. When the smart money (Blackrock & Vanguard) flows in, the volume and price slowly pick up where the volume of buys shall be greater than the volume of sells. The moving average of the stock volume may continue to increase when smart money flows into the Chinese markets.
Hold your horses! We are not yet ready to buy in. There are more pointers to gauge and confirm the trend. We do not want to invest too early only in sitting years over losses. Rather wait to confirm the uptrend and follow the smart money.
Let’s move on to step three: Moving Averages:
MCHI is trading below the 200-EMA (Exponential Moving Average), indicating a strong downtrend. MCHI is trading below 50-day, and 20-day EMA, which implies MCHI is in a strong downtrend.
Unless you want to short to capture the uptrend, one must wait and confirm the trend reversal. One of the simplest ways to identify the trend reversal is to draw a trendline connecting by simply connecting the lower highs to the downtrend. The most important point when drawing a trendline is that:
A Trendline has to connect at least two points
and, Three to confirm the trend direction!
I have drawn a simple downtrend line in red where one of the many ways to confirm a trend reversal is when the stock price breaks above the red line and increase further.
Another way to confirm a trend reversal is the ‘Golden Cross’ of moving averages. Before understanding the trend reversal using moving averages, it is essential to know a ‘Dead Cross’ & a ‘Golden Cross.’
Golden Cross — is when the faster-moving average cross above the slower moving average (example: when the 20-day and 50-day EMA cross above the 200-day EMA).
Dead Cross — is when a faster-moving average cross below the slower moving average (example: when the 20-day and 50-day EMA cross below 200-day EMA).
Now that we know the Golden & Dead cross, what does it mean about stock price or price action?
A Golden Cross — indicates a ‘Bullish’ sentiment &
A Dead Cross — indicates a ‘Bearish’ sentiment
Most traders go ‘Long’ on a Golden Cross and ‘Short’ on a Dead Cross.
Now, let’s observe the EMAs for MCHI ETF. In the above image, I have plotted the 20-day (Green), 50-day (White), and 200-day (Red) EMAs. The color of these lines is irrelevant as long as one can identify their day lengths. I have circled the golden cross in green and the dead cross in red. If all the three moving averages cross simultaneously, it is referred to as “Triple-Cross Over Golden Cross.”
Do not get carried away by golden or dead crosses as the only indication of bullishness or bearishness. A typical cross-over can be used as the confirmation along with other indicators.
“All big rallies start with a golden cross, but not all golden crosses lead to a big rally”
For example, one can use the trendline break out and moving average cross overs to confirm the uptrend and vice-versa for the downtrend.
With all the above being said, based on the charts, I believe MCHI ETF is yet to reverse, and it is worth waiting until it breaks above the downtrend line as well as exhibits the golden crossovers as explained above.
I hope this was useful, and Do your due diligence if or when placing a trade. All ideas stated here are my own and do not represent trading or investment advice.