Stocks are breaking out to new highs, however, not all areas of the market are participating to the same extent.
Today we’re looking at a chart that suggests one market laggard is potentially undergoing a trend change and may outperform in the weeks and months ahead.
Here’s a daily line chart of the Chinese Internet ETF (KWEB) relative to the S&P 500 (SPY). Since peaking in March 2018 this ratio has fallen 45% to its August low, but it’s beginning to show some signs of life.
Over the last 6 months, we’ve seen momentum readings improving, suggesting downside pressure was waning and a potential price reversal was ahead. The problem was, we didn’t have price confirmation and so there was no trade to be made.
Click on chart to enlarge view.
This week that’s potentially changing as prices attempt to close above former support at 0.151-0.154. This would confirm the bullish momentum divergence that’s been building, as well as a failed breakdown.
From failed moves typically come fast moves in the opposite direction, so that’s the bet we’re making here.
If prices are above this former support then this thesis is intact and we’d expect Chinese Internet stocks to outperform US stocks in the weeks, months, and quarters ahead.
This consolidation in the Chinese A Shares Index (ASHR) resolving to the upside would also be a major tailwind for the sector. We think this is a continuation pattern that targets the 2018 highs.
Overall, the weight of the evidence is suggesting Chinese stocks are headed higher and the Internet sector should be right there with it.
For Premium Members we outlined the Chinese Internet stocks we like to take advantage of this thesis.
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Thanks for reading and let us know if you have any questions!