ASHR: Sabre-Rattling And Trade Wars Make This China ETF A Short Candidate
- On-going uncertainty regarding tariff issues and “trade wars” are unsettling global markets as a whole.
- ASHR is an ETF that is now much more readily available for trade amongst U.S. investors (and other investors around the world alike).
- ASHR is considered overpriced at current levels based on macroeconomic issues as well as technical indicators.
Context: Why does this opportunity exist? Why is the stock under/overpriced?
On-going uncertainty regarding the tariff issues and “trade wars” that are continually discussed at the present time are unsettling global markets as a whole, which is being reflected within the two primary markets involved – the United States and China. NYSEARCA:ASHR, an ETF covering 300 of the largest, most liquid “A-shares” listed on the mainland Chinese markets, is an instrument that is now much more readily available for trade amongst U.S. investors (and other investors around the world alike) which has been highlighted and described elsewhere recently, although no definitive investment strategy or “call” was recommended within the article.
The article presented here provides a contrarian view to traditional thought (conventionally “buy on the dips”) in that ASHR is considered overpriced at current levels based on the macroeconomic issues currently at hand, as well as the technical indicators which are potentially signifying further declining performance and additional underlying negative sentiment. Further weakness in global markets will be reflected in ASHR, which can be readily traded directly or through the use of options.
Looking at a weekly chart for ASHR (Figure 1), it is clear that a large drop in the price of the ETF occurred during the week ending 09-Feb-2018 (a decrease of 10.8% on significant volume), which has resulted in “sideways” trading between a range of $30-$33 ever since over the past couple of months. As at the close of trade on 06-Apr-2018, the share price of ASHR has settled at the lower end of this range ($30.28) on average trading volume for the week with worsening relative strength (compared to the S&P 500 index) and a declining MACD and Chaikin Money Flow on both weekly and daily charts. One of the most compelling factors to consider is that the price of the ETF has closed below the 30 week moving average (a measure of importance very similar to the 200 day moving average) with a shorter time-frame 10 week moving average about to cross over in a downwards fashion, which could potentially act as further resistance for the ETF.
Figure 1: Weekly chart for ASHR
Scope: How big is the opportunity? How big is the downside risk?
There are three potential profit targets for a “short” in ASHR, and two “stop levels” that can be utilized, depending on your risk tolerance levels and demand for risk-reward. From the risk management perspective, the most conservative stop-loss would be placed just above the 30-week moving average, which is currently $31.23. The alternative stop-loss would be placed just above the swing-high formed on the weekly chart by the weekly bar of the week ending 02-Mar-2018 (i.e.: $32.89) – for even more protection, utilize the next trading ‘psychological barrier’ of $33.00.
The former levels of support on the chart are representative of the profit targets for ASHR and provide asymmetric risk/reward opportunity – (i) the low of the “down week” ending 09-Feb-2018 ($28.80), (ii) the low of the “down week” ending 11-Aug-2017 ($27.40), and (iii) the low of the “down week” ending 12-May-2017 ($24.00).
Catalyst: What might drive the change in investor perception/share price? What will catalyze a change in the earnings potential or share price (perception) of the company?
Persisting issues with tariffs and “trade wars” are most definite to result in uncertainty in global markets, with the likelihood of ASHR continuing to decline in value whilst global leaders “flex their muscles” in an effort to exert dominance. Who will win these “trade wars”? Most likely no-one. One thing is for certain – the markets have already shown their disdain for tariffs and “trade wars”, amongst many other factors, in the form of increased volatility and large swings to the downside that tend to be compensated by irregular, albeit smaller, moves to the upside that have been inept to maintaining a sustained overall market up-trend.
Timeframe: Is this a multi-year play, or a short-term opportunity?
For the meantime, this appears to be a short-term opportunity that should result in an outcome over the next couple of months, at least with respect to the first target. Depending on the strength of the resulting trend, this weakness in the ETF may persist for quite some time should the initial support level be breached, with the likelihood of multi-year highs in the ETF reducing by the day.
Utilizing the most conservative stop-loss of $33.01 alongside a potential target of $24.00 and current share price of $30.28, this short opportunity represents a reward-risk ratio of 2.30. Should a more aggressive stop-loss of the 30-week moving average of $31.23 be utilized, the reward-risk ratio increases dramatically to 6.61.
Trading ASHR through the use of options further increases the reward-risk ratio substantially, depending on the strategy employed.
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