Chinese stocks logged their first gains in four days on Wednesday, halting a sharp sell-off driven by concerns over tightening government regulation that saw $1.5 trillion slashed from Hong Kong and mainland shares in recent sessions.

Yesterday's turnaround came after China's media tried to settle investors' nerves. The state-owned Securities Times said systemic risks "do not exist in the A-share market overall" and reassured investors that the economy was in a steady rebound stage. The front-page commentary added that economic fundamentals remain the same and that markets will stabilize.

Key Takeaways

  • Chinese stocks bounced as state-run media tried to settle investors' nerves after several days of heavy selling.
  • iShares MSCI China ETF (MCHI) shares broke down from a head and shoulders top earlier this month but bounced strongly after finding support from the January 2020 high.
  • Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR) shares temporarily crashed below crucial support but promptly recovered above that level, increasing the probability of a bear trap.

Investors and traders can gain exposure to Chinese equities through the two U.S.-listed China exchange-traded funds (ETFs) outlined below. Let's take a closer look at the metrics of each fund and work through several trading ideas to capitalize on the recent market volatility.

iShares MSCI China ETF (MCHI)

The iShares MSCI China ETF (MCHI) aims to generate a similar return to the MSCI China Index – a benchmark providing exposure to a broad array of investable Chinese shares across all market-cap sizes. The underlying index, made up of more than 500 holdings, comprises H-shares, B-shares, Red-chips, P-chips, and foreign listings. Tech giants Alibaba Group Holding Limited (BABA) and Tencent Holdings Limited (TCEHY) command the largest single stock allocations with respective weightings of 13.3% and 13.12%. Trading wise, a narrow 0.01% average spread, coupled with daily dollar volume liquidity of $240 million, makes the fund a trader's favorite in the segment. MCHI boasts total net assets of $7.33 billion and offers a 0.95% dividend yield, but the ETF has shed 11.1% since the start of the year as of July 29, 2021.

MCHI shares broke down from a head and shoulders top earlier this month but bounced strongly after finding support from the pre-pandemic January 2020 high. The stock also completed a three-day bullish reversal chart pattern at this level, referred to by technical analysts as a bullish abandoned baby – a formation often signaling a market bottom. Those who buy here should look for a move back up to a zone of resistance between $77 and $81. Protect capital by placing a stop beneath Wednesday's low at $69.88.

Chart depicting the share price of the iShares MSCI China ETF (MCHI)

TradingView.com

A bullish abandoned baby forms in a downtrend and is composed of three price bars. The first is a large down candle, followed by a doji candle that gaps below the first candle. The next candle opens higher than the doji and moves aggressively to the upside.

Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR)

With net assets of $2.77 billion, the Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR) seeks to track the performance of the CSI 300 Index. As its name suggests, the fund provides exposure to the 300 largest and most liquid Chinese shares traded on the Shanghai and Shenzhen exchanges, known as China A-shares. As a result, the ETF tilts toward large caps with a financial sector bias (nearly 30%). More than 2.5 million shares exchange hands per day on an average 0.03% spread to minimize transactions costs. Meanwhile, a 0.65% expense ratio makes buy-and-hold investing a little more costly. As of July 29, 2021, ASHR yields 0.80% and trades 4.82% lower on the year. Over the past 12 months, the fund has gained 16.5%.

The ASHR share price temporarily crashed below crucial support at $37.60 but promptly recovered above that level in Wednesday's session, increasing the probability of a head-fake trade to trap bears. Furthermore, an abandoned baby chart pattern in this area increases the chances of a reversal back to the upside. Active traders who buy around the current price should aim to book profits on a test of the late-May high around $42 while managing risk with a stop positioned under yesterday's low at $37.44.

Chart depicting the share price of the Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR)

TradingView.com

A head-fake trade is when a security's price makes a move in one direction but then reverses course and moves in the opposite direction. 

Disclosure: The author held no positions in the aforementioned securities at the time of publication.