Time to Buy this Chinese Tech Stock?

Chinese technology stocks had a rough year in 2018. The KraneShares China Internet ETF, KWEB fell 33% after a stellar year in 2017 where the ETF returned nearly 70%. The index hit a 52-week low on January 3rd of the new year but since then has rallied over 15%. Many chart watchers think the bottom is in and are hunting for relative strength from the individual names within the Chinese tech sector.

Craig Johnson is the chief market technician at Piper Jaffray. In a segment on CNBC, he argues that one Chinese tech stock, in particular, Tencent ($TCEHY) is flashing a buy signal. Tencent represents nearly 10% of KWEB, making it the largest holding within the ETF. Johnson begins by defining the underlying trend. He acknowledges that for some time Tencent has been in a significant downtrend since its highs in January of 2018. However, he explains that we’ve recently reversed this downtrend as the stock has been able to make a series of higher highs and higher lows. In addition, it has recently broken out above its downtrend line, as illustrated in the chart he provided below.

Craig Johnson adds that the main reason he’s bullish on Tencent is that the stock just flashed a MACD buy signal. The MACD (moving average convergence divergence) is an indicator used to measure price momentum. Johnson explains the significance of a MACD buying signal by offering this interesting stat:

“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 is not as upbeat on the overall Chinese stock market and thinks that Tencent is a unique opportunity within the broader market. When asked about the overall Shanghai Composite he explains that the index has seen some serious technical damage as it recently broke its uptrend from the 1996 lows. You can watch the entire segment on CNBC here.