[Chart Of The Week] KWEB's Bearish To Bullish Reversal Continues

From the desk of Steve Strazza @Sstrazza

Sentiment has not been good for Chinese Equities with a handful of recent sanctions adding to the general uncertainty around China-US relations. For the most part, we're seeing this reflected in price as the Shanghai Composite and iShares China Large-Cap ETF (FXI) are trading at multi-month lows relative to the S&P 500.

Interestingly enough, the area being hit hardest with negative headlines is one of the few bright spots in China's market right now... Technology and Internet stocks.

In this post, we take a look at the improving relative strength from this group and offer trade ideas in some of its leading stocks.

Here is the ratio chart of the Kraneweb Chinese Internet ETF (KWEB) vs the S&P 500 (SPY) which we've been writing about since November.

Click on chart to enlarge view.

Price resolved higher from an 18-month base in March, completing a long-term term bearish-to-bullish trend reversal. The pattern is valid as long as price is above the 0.165 - 0.170 level.

The ratio is consolidating after making fresh 52-week highs earlier this year. Momentum is in a bullish regime and price is above an upward sloping 200-day moving average, which is not something we've seen for several years. If it holds above former resistance, the bias is higher in this relative trend and we'd expect to see some acceleration to the upside.

Here is KWEB on an absolute basis, which is also trying to resolve higher after basing constructively for much of the past two years.

Notice how similar it looks to the relative chart. While still a bit messy and has work to do, price is gradually transitioning back into an uptrend. We can see this through the series of higher highs and higher lows over the past year.

We expect further upside and more new highs in the future as long as price can hold above 48.50. Below that, things are likely to remain messy.

As always, we can take advantage of these bullish trend reversals by betting on the leaders in the space.

Here are some of the strongest components in the Chinese Internet ETF which are currently offering favorable risk/reward setups on the long side.