Playbook: China Stock Could Have Room to Run

Futu stock has cleared key resistance in the last few weeks

CFA, Senior Market Strategist
Sep 14, 2022 at 9:00 AM
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The below is an excerpt from this past Monday's episode of Schaeffer's Playbook of the Week, featuring Schaeffer's Senior Market Strategist Bryan Sapp, CFA. Below, Bryan makes a short -- and possibly longer -- term bullish case for Futu Holdings Ltd (NASDAQ:FUTU).

Futu is a Chinese retail name. You’ve heard all sorts of negative news about China with the potential delisting’s and accounting issues for the ADRs on the U.S. exchanges. That battle is ongoing, however despite the negative news, FUTU is up 7% year-to-date, outpacing the S&P 500 Index (SPX) by a wide margin.

Positive price action amid negativity is a contrarian signal you want to see. It’s setting up inside a bull flag right now, looking at the late August levels. It rallied sharply on heavy volume and is pulling back on decreasing volume. That’s a nice setup. You have support from the 20-day moving average, a key trendline in the past that FUTU has really respected. Ever since a bear gap in July, that trendline was resistance, per the chart. Then in September, it gapped back above that trendline.

One thing I also like seeing below is the 14-day Relative Strength Index (RSI). It was near overbought, but then sold off last week. Those overbought readings have been worked off, so there’s some bullish RSI divergence. I really like seeing that.

FUTU PLBK

The $43 level has been a key pivot. It’s been support that was tested successfully in the last two weeks. You can key against there that gives you very defined risk to trade against. It’s made a series of higher lows since March and working on potentially a higher high. That’s a potential trend change to watch.

In the event of any positive development with China, 10% of FUTU’s total available is sold short. There’s short squeeze potential, and a stock that can make huge moves in a short period of time. As an options buyer, you generally want to be in those names. They’re the names that net you 200, 300% winners in short order.

Options are currently extremely cheap, priced in the second percentile. That’s something you welcome as a premium buyer. It’s a good looking set up. It could easily run to the $60s and $70s if conditions are right. You’re rising very little and there’s a lot of potential on this name.

Join Schaeffer's Playbook of the Week now and tune in every Monday morning at 8:30 a.m. to get ready for the trading week with me. Click here for more information to get started.

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