NetEase, Inc. (NTES) is a Chinese Internet company that provides online content, communications and commerce. The company reports quarterly earnings after the closing bell on Wednesday, May 15, with the stock trending higher above its "reversion to the mean," which is its 200-week simple moving average at $233.00.
The stock closed Tuesday, May 14, at $262.37, up 11.5% year to date and in bull market territory at 42.1% above its 2018 low of $184.60 set on Sept. 11. NetEase set its 2019 intraday high of $289.68 on May 3 just as the U.S.-China tariff discussions began. The stock is down 9.4% since then.
Analysts expect NetEase to post earnings per share of $2.47 when it reports results Wednesday afternoon. The stock is not cheap, as its P/E ratio is 36.01 with a dividend yield of just 0.75%, according to Macrotrends. This stock is a momentum play, and its upside potential is questionable.
The daily chart for NetEase
The daily chart for NetEase shows that the stock has been above a "golden cross" since Jan. 24, when the 50-day simple moving average rose above the 200-day simple moving average to indicate that higher prices lie ahead. With this pattern in play, investors should have added to long positions on weakness to the 200-day simple moving average, and the last time this happened was on March 25 when the average was $232.63.
The close of $235.37 on Dec. 31 was an important input to my proprietary analytics. Annual and semiannual risky levels remain at $292.19 and $368.37, respectively. The close of $241.45 on March 29 was another input to my analytics, generating a second quarter value level of $246.91. The close of $284.53 on April 30 was the most recent input to my analytics, and the monthly risky level for May is $287.67, which was tested on May 1 through May 3 as an opportunity to reduce holdings.
The weekly chart for NetEase
The weekly chart for NetEase will become negative if the stock ends this week below its five-week modified moving average of $264.03. Note how the stock has been tracking the 200-week simple moving average, or "reversion to the mean," higher since the week of Aug. 17, when the average was $209.85, and the level is at $233.01 this week. The 12 x 3 x 3 weekly slow stochastic reading is projected to slip 80.26 this week, down from 82.32 on May 10. A close this week below $264.03 with the stochastic reading below 80.00 would be negative.
Trading strategy: Buy NetEase shares on weakness to the quarterly value level at $246.91 and then to the 200-week simple moving average at $233.01. Reduce holdings on strength to the monthly and annual risky levels at $287.67 and $292.19, respectively.
How to use my value levels and risky levels: Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31. The original semiannual and annual levels remain in play. The weekly level changes each week; the monthly level was changed at the end of January, February, March and April. The quarterly level was changed at the end of March.
My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.