The Stock:Sino-Forest Corp.
Recent price: $14.40
Trend: The Chinese stock market has been moving up since the beginning of the year, adding another 5 per cent last week. The Shanghai composite index has been labelled Stock Trends Bullish since early April and these green shoots have started to accelerate investment flows back into the Chinese economy.
Hong Kong is now awash in foreign capital - the Hang Seng Index is up 57 per cent in the past three months - as investors, eager to put cash in play, are driving capital inflows into Asia back to the highs of the 2007 bull market. The Chinese economy offers plenty of upside for investors hungry for returns.
Most of the exchange-traded funds focused on Asian markets have been highlighted by the Stock Trends filters this spring. Emerging markets have set the pace in the global market recovery.
The Trade: Investors have a number of commodity, industrial, and technology sector options to capture the Asian bull trend, but what's a more natural and Canadian investment than trees?
Sino-Forest Corp. is a Mississauga-based forest plantation operator in China that is capitalizing on the resurgent Asian economy. The stock is now in the Stock Trends Bullish Crossover category (designating that the 13-week moving average trend line has moved above the 40-week moving average trend line), having broken out of its previous bear trend in recent weeks.
The stock advanced another 17 per cent last week amid a very successful $330-million bought deal that showed just how eager investors are in this China play. Strong price momentum, a bullish trend category and growing trading volume present Sino-Forest as a market timing buy.
The Upside: The potential for a rally back to Sino-Forest's previous bull market high - it peaked at $26.15 before the global market collapse in November, 2007 - gives investors an enticing risk/reward profile.
In terms of price pattern, last week's move above $14 took Sino-Forest's share price above a resistance level and returns the stock to the lower limit of last summer's trading range. This makes a move to $20 a reasonable goal if the market manages to develop a summer rally.
The Stock Trends 13-week Relative Strength Indicator - now showing Sino-Forest outperforming the S&P/TSX Composite Index by 29 per cent - suggests that the stock's price momentum will continue to give this trade an edge over the overall market return in the coming months. Although Sino-Forest's rally from a low of $6.52 three months ago more than doubles the stock's advance to the current price level, flush investors driving the Chinese market will continue to fuel this stock's advance.
The Downside: Investors always want to be right. In truth, even the most successful traders are wrong more often than they are right.
It is only good money management practices that turn a middling batting average into a profitable trading record. That means an integral part of every trading plan is a trade exit strategy.
In the case of Sino-Forest, investors entering the stock should have some basic expectations of how the stock will trade in the coming weeks. Setting an immediate stop price (the share price that would trigger a sell) at the $13 level would potentially lose this trade amid short-term volatility in price. The trend line support has not yet developed, but the early stage of this trade should allow for a pullback to $11, near the 13-week average share price, before bailing on Sino-Forest. In the best case scenario, the stock will continue its rally in the short-term and investors can move their stops to the $14 level.
Skot Kortje has been analyzing stock market trends for 15-years using trend analysis. His Stock Trends indicators have been published by The Globe and Mail since 1995. For more go to http://www.stocktrends.ca/