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A silver lining showed up after the deeply oversold condition in the stock market last week where a number of the bullish tell-tale signs as explained in the video at the bottom of this post pointed to a countertrend rally off the extreme bearish sentiment.
On the other hand, China stocks as represented via Invesco Golden Dragon China ETF (PGJ) and KraneShares CSI China Internet ETF (KWEB) have started the bottoming process in March 2022 and outperformed S&P 500 since May 2022.
Using Wyckoff Method to Spot the Accumulation Pattern in KWEB
This is significant because after losing the energy sector (XLE) as the leadership in the stock market in mid of June 2022, China stocks could potentially be the next leader to start the next bull run. Only when the group takes charge as the leader, individual stocks are more likely to sustain their uptrend. Let’s adopt the Wyckoff method find out the potential accumulation structure as shown in the chart below.
After a parabolic run up created a buying climax off the top in Feb 2021, KWEB had a distribution on the way down from the peak at 97 followed by a down trend lasted till May 2022 as shown in the down channel.
The first clue of the potential accumulation process showed up in March 2022 where capitulation was seen as reflected in the spike of the volume (annotated in blue arrow). A selling climax was created followed by an automatic rally, which defined the trading range between 20-33. The automatic rally was considered as a Wyckoff change of character, which temporarily stopped the down trend into a trading range as it is the biggest up wave since the downtrend started in February 2021.
The subsequent reactions in May 2022 (highlighted in blue) were accompanied by increasing of volume yet still forming a higher low, suggested supply absorption.
On 31 May 2022 KWEB decisively broke above the down channel followed by a decent rally tested the resistance at 31. This was the first time it broke out the down channel, suggested change of trend is on the way.
The tight consolidation in June 2022 after hitting the resistance at 33 was shallow and committed above the immediate support level at 30. Increase of the volume during the consolidation suggested supply absorption, similar to May’s reaction, but at a higher level.
The above are all the bullish characteristics of accumulation of KWEB shares while the market sentiment is extremely bearish.
A breakout and commitment above 33 in KWEB will mark the completion of the accumulation since the selling climax on 14 Mar 2022 and likely to start a major sign of strength rally to test 40 before another reaction. The next price targets for KWEB are 50 and 60.