Buy JD.com on a Chinese stock breakout: MKM Partners

Chinese stocks are bouncing back hard since Monday after five straight weeks of losses.

The FXI China large-cap index has roared nearly 2% this week, almost double the gain of the S&P 500. The group has rebounded after President Donald Trump eased back on trade tensions, recommitting to a trade deal with China.

JC O’Hara, chief market technician at MKM Partners, sees Chinese online retailer JD.com on the verge of a major breakout.

“When you look at this chart, you can actually see a strong bearish to bullish reversal taking place and the formation that’s occurring is out of a cup-and-handle [pattern],” O’Hara said Monday on CNBC’s “Trading Nation. “

The “handle” of this technically bullish pattern is typically a period of consolidation before a break higher. JD.com has been in a range between $26 and $32 since March.

“We want to pay attention to the $33 level. We break above $33, I think we have 10% to the upside,” said O’Hara.

However, another Chinese name could be about to break down, he said.

“Look at Tencent. Now over the last year or so we’ve been seeing a rounding top formation and it’s sitting right on support at $41 so if support fails, this stock has massive downside to the 2018 lows, ” said O’Hara.

A decline to last year’s lows implies 22% downside for Tencent.

Michael Bapis, managing director at Vios Advisors at Rockefeller Capital, does not believe the broader rebound in the Chinese stocks has staying power.

“I don’t think you’re going to see anything change until the tariff-trade war discussion ends, and you need economic stimulation in China because 53% of this ETF roughly is banks or finance stocks,” Bapis said Monday in the same “Trading Nation” segment. “Until the Chinese economy starts to grow, and those companies start to make money again, I don’t think you’re going to see it move anywhere.”

Financial stocks make up more than half of the FXI ETF’s components, a larger share than any other sector. Its second weighting, technology, comprises just 16% of the ETF.

“The cloud that’s hanging over it, even with a 2.2% dividend yield, you’re not going to see it move until we move and the Chinese economy starts to move,” Bapis said.

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