There has been much talk of geopolitical trade war between the U.S. and China over the past several months. For the most part, active traders have focused their attention on market segments within North America that tend to be known for stability such as financials, utilities, and commodities. Based on the chart patterns that we'll discuss below, it appears as though the markets across Asia are poised to move higher. This could be a sign that now is the time to increase exposure to this region.
iShares Asia 50 ETF (AIA)
As you may know, exchange-traded funds (ETFs) are the product of choice for active traders looking to trade a specific sector, country, or niche. Taking a look at the chart of the iShares Asia 50 ETF (AIA), which is designed to give holders access to 50 of the largest Asia stocks in a single fund, you can see that the price has recently broken above the resistance of an influential trendline (shown by the blue circle). The strong performance combined with the recent bullish crossover between the moving average convergence divergence (MACD) and its signal line suggests that the bulls are in control of the momentum and that target prices could be readjusted so that they align with the 2019 high.
Based on the chart, we'd expect followers of technical analysis to place their buy orders as close to current levels as possible to take advantage of the lucrative risk-to-reward ratio. From a risk management perspective, traders will likely look to protect against a sudden sell-off by placing stop-losses below $59.53, which is equal to the current level of the 200-day moving average. For those new to trading, this long-term indicator is also commonly used to track changes in major trends, and the recent price action suggests that 2020 could be a good year for Asian stock markets.
iShares MSCI China ETF (MCHI)
With a weight of 35.82%, the country with the most representation of the AIA ETF is China. As discussed above, those looking for targeted exposure to this region will likely want to take a look at popular ETFs such as the iShares MSCI China ETF (MCHI). As you can see from the chart below, the price is currently trading within a defined triangle pattern, as shown by the converging dotted trendlines.
This type of chart pattern is a favorite of trend traders because the support and resistance lines mark clear levels for where to place buy and stop orders. Using the recent price action of the AIA ETF as a leading indicator, active traders will likely hold a bias to the upside and watch closely for a move above the upper trendline to trigger their buy orders. Target prices will likely be set near $66, which is equal to the entry price plus the height of the pattern.
iShares MSCI South Korea Capped ETF (EWY)
Another Asian country that will likely capture the attention of active traders over the coming weeks is South Korea. Taking a look at the chart of the iShares MSCI South Korea Capped ETF (EWY), you'll notice that a well-defined inverse head and shoulders pattern has formed. The recent breakout beyond the neckline of the pattern and its 200-day moving average suggests that the bulls are in control of the momentum and that target prices will likely be set near $67, which is equal to the entry plus the height of the pattern.
The Bottom Line
Many active traders have chosen to trade recent geopolitical volatility by focusing on stable sectors such as financials and utilities. However, as discussed above, well-defined chart patterns are pointing to lucrative risk-to-reward setups in the Asian markets and suggesting that prices could be poised to move higher over the weeks and months ahead.
At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.