Is China’s Stock Market a Golden Opportunity or a Ticking Time Bomb?

Dear Valued Subscriber,

This week, we’re diving into the recent volatility in China’s stock market and extracting valuable lessons for smart investors. Here’s what you need to know:

The China Stock Rollercoaster:

• Many retail investors saw extreme gains followed by crushing losses.

• Some traders lost three years’ worth of salary in just days.

Key Lesson: News vs. Price Action

1. “Never trust the news. By the time you hear it, it’s probably very late. Only trust price action.”

2. The market had been moving since September, but major news coverage didn’t hit until October.

Timing Is Everything:

1. Ideal entry points for strong Chinese stocks like Alibaba (BABA) and JD.com (JD) were in mid-September.

2. Many investors bought at market peaks in early October, leading to significant losses.

Technical Analysis Insights:

• Watch for tight price action and stocks “coiling up” — it often precedes big moves.

• Use the 50-day moving average as a potential entry point.

• Remember: “Stocks breathe in and out” — expect corrections after strong moves.

Risk Management is Non-Negotiable:

• Implement stop-loss orders to limit potential losses.

• Aim to risk no more than 1–2% of your account on any single position.

• “Never invest scared money” — avoid using funds you can’t afford to lose.

Stock Selection Matters:

1. Focus on profitable companies with strong fundamentals (e.g., BABA, JD, TCOM).

2. Be cautious with speculative stocks showing weaker patterns.

How to Spot Weak Stocks:

1. Compare to Market Leaders:

• Always compare a stock’s pattern to the strongest stocks in the sector

• Strong stocks like Alibaba (BABA) showed clear breakouts above the 50-day moving average

• Weak stocks like Baidu (BIDU) lagged behind, failing to show similar strength

2. Analyze Price Action:

• Look for stocks that fail to hold gains

• Example: NIO and Baidu showed weaker patterns compared to sector leaders

3. Check Fundamental Metrics:

• Key metrics: Return on Equity, Earnings Per Share growth, Revenue growth

• Stronger companies (like JD, TCOM, BABA) show positive trends in these areas

4. Watch for Excessive Volatility:

• Weak stocks often show larger price swings

• Example: JKS had a 40% drop after its initial surge, indicating instability

Why This Matters:

• Weak stocks are often the first to crash in market corrections

• They tend to have larger drawdowns, potentially leading to bigger losses

• Focusing on stronger stocks can improve your risk-reward ratio

The Move Isn’t Over:

1. Strong uptrends often continue after correcting to the 20-day or 50-day moving average.

2. Current market correction may present new opportunities for patient investors.

Bottom Line: Success in volatile markets comes from disciplined analysis, not chasing headlines or viral predictions. Stay focused on price action, manage your risk, and always be prepared for the next opportunity.

Remember: “The price tells all. The news is just for your entertainment.”

Happy trading,

Valentine