As Chinese stocks rally, Tencent is flashing a major buy signal

Even with the U.S.-China trade war still raging, Chinese stocks are on fire.

Increasing trade tensions between the U.S. and China through the back-half of 2018 took a sledgehammer to Chinese shares. Baidu ended the year with a 32 percent loss, while Tencent was down 23 percent, and Alibaba dropped 21 percent.

However, the FXI China large-cap ETF has surged 7 percent in the past three months, while U.S.-listed China-based stocks such as Baidu, Alibaba, Tencent and Sina have rallied by at least 8 percent to begin 2019. And it's Tencent that's flashing a buy signal, says Craig Johnson, chief market technician at Piper Jaffray.

"There's certainly some opportunities to trade here," Johnson said on CNBC's "Trading Nation" on Friday. "If I look at the chart of Tencent, here's a stock that's traded off meaningfully. We've now just reversed the downtrend."

Tencent had plummeted 47 percent from its January peak last year to its trough last October. Since that bottom, it has rallied 35 percent to four-month highs.

A key technical indicator, its moving average convergence divergence (MACD), is also suggesting a bullish lean to the stock, says Johnson. A stock's MACD demonstrates the correlation between a 26-period exponential moving average and a 12-period exponential moving average. When measured against a baseline, the indicator can suggest bullish or bearish momentum.

"When we've seen a MACD buy signal happen like we have right here, we've seen that 30 days later that the stock is typically up almost 13 percent," Johnson explained. "This would be one we'd be buying."

A 13 percent rally would take Tencent's shares above $49, a level last seen in July 2018.

The rally in the rest of the Chinese stocks should also continue as investors pick up bargains, says Gina Sanchez, CEO of Chantico Global.

"The reality is that the Chinese stocks have been extremely cheap, and even with this rally they're still actually fairly cheap," Sanchez said on "Trading Nation" on Friday.

The FXI ETF trades at below 8 times forward earnings. By comparison, the S&P 500 has a 15 times multiple.

"You look at a lot of these big names – Baidu, Tencent, Alibaba – they still can make tremendous amounts of growth just within the Chinese economy," Sanchez added. It means the "trade outlook has an impact, but some of these stocks they have been beaten down for no good reason across emerging markets."

Videos

Trades to Watch

Trader Bios

About

Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

Read more

Connect