U.S.-Traded Chinese Stocks Sink Amid Possible Delisting

In a surprise move ahead of scheduled trade talks between Washington and Beijing on Oct. 10 and 11, the Trump administration is considering delisting Chinese companies from U.S. stock exchanges in part of a broader effort to limit U.S. investment in Chinese companies to protect American investors, according to a Bloomberg report.

As of February, 156 Chinese companies trade on U.S. exchanges with a total market capitalization of $1.2 trillion, per government data. Chinese authorities have remained reluctant to let overseas regulators and accounting firms audit local companies, citing national security concerns.

"This is a very high priority for the administration. Chinese companies not complying with the PCAOB (Public Company Accounting Oversight Board) process poses risks to U.S. investors," said a source close to the deliberations, per Reuters.

Many U.S.-listed Chinese stocks slumped between 5% and 10% Friday afternoon after the report surfaced, which may result in follow-through selling ahead of the eagerly awaited early October trade discussions. Traders seeking short exposure should consider these three Chinese companies listed on U.S. exchanges that look weak from a technical standpoint. Let's work through several trading ideas to profit from continued selling.

Alibaba Group Holding Limited (BABA)

With a market cap of over $400 billion, Alibaba Group Holding Limited (BABA) provides online and mobile commerce businesses in China as well as globally. The 20-year-old company operates through four business segments: Core Commerce, Cloud Computing, Digital Media and Entertainment, and Innovation Initiatives and Others. Alibaba, which many consider China's answer to e-commerce titan Amazon.com, Inc. (AMZN), saw its fiscal 2020 first quarter bottom line increase 56% on a year-over-year (YOY) basis, while revenue grew 42% from the prior-year quarter. Management cited strength in the company's China commerce retail business, Ele.me, and robust sales growth of Alibaba Cloud for the solid results. The company started trading on the New York Stock Exchange (NYSE) on Sept. 19, 2014, after raising $25 billion to record the largest initial public offering (IPO) ever. Alibaba stock has returned 21.09% on the year as of Sept. 30, 2019.

The commerce conglomerate's stock added most of its year-to-date (YTD) gain between January and April before giving way to mostly range-bound price action over the past five months. More recently, the stock plunged 5.15% on above-average volume Friday afternoon as news of a possible delisting of Chinese issues broke. In a bearish sign, price closed below the closely watched 200-day simple moving average (SMA) – a move that may trigger additional selling this week. Traders who open a short position should consider buying to cover near $150, where price may catch a bid from a crucial support area. Protect capital by placing a stop-loss order somewhere above the 50-day SMA.

Momo Inc. (MOMO)

Momo Inc. (MOMO) operates a mobile-based social and entertainment platform in China, enabling its users to establish and expand social relationships based on location and interests. The $6.46 billion company, which listed on the Nasdaq in December 2014 after a successful $216 million IPO, drives the lion's share of its revenue from live video service, value-added services, mobile marketing services, and mobile games. The social media giant posted Q2 adjusted earnings of 82 cents per share, surpassing analysts' expectations of 72 cents per share. However, the bottom line contracted 39.3% for the year-ago quarter. Momo hit a roadblock in April when its poplar dating app Tantan was removed from app stores in China as government authorities ordered a review of cyberspace content. As of Sept. 30, 2019, Momo stock has a YTD return of 34.06%.

Momo shares have oscillated within a broad symmetrical triangle since early April. A breakdown finally occurred in Friday's session, when price closed below the pattern's lower trendline and the 200-day SMA on solid volume. Traders who short sell at these levels should look for a move to around $26, where the stock encounters support from a horizontal line connecting an array of price action over the past 12 months. Implement risk management by placing a stop order above Friday's high at $33.58 and amending it to the breakeven point if price drops beneath the early-August swing low at $28.82.

iQIYI, Inc. (IQ)

Headquartered in Beijing, iQIYI, Inc. (IQ) provides online entertainment services under the iQIYI brand in China. The company's primary services include internet video, live broadcasting, online games, online literature, animations, e-commerce, and social media platforms. iQIYI, which formed in 2010, raised $2.25 billion in the United States before listing on the Nasdaq in March 2018. Even though the company reported a 15% increase in Q2 YOY revenue and saw its subscriber base top 100 million users, it still posted a net loss for the period of RMB2.3 billion ($339.0 million). Trading at $16.61 with a market cap of $12.04 billion, the stock has gained 11.70% so far in 2019, underperforming the internet content and information industry average by about 7% as of Sept. 30, 2019.

Since setting a 2019 YTD high just above $29 on Feb. 25, the iQIYI share price has remained stuck in a downtrend and looks destined to test the January swing low at $14.35. Although the shares have fallen sharply over the past two weeks, the relative strength index (RSI) sits above oversold territory, giving price ample room to slide further before the current downside move becomes exhausted. Those who short the stock here should cut losses if price closes above the 50-day SMA and take profits if the stock does indeed fall to the January low.