It was only early-November, 2022, when China was considered to be “uninvestable“. After two years of crackdowns on the technology sector, the country’s stock market was in the doldrums. Behemoths such as Alibaba and Tencent saw their market valuations cut by over 70%. Xi Jinping had just secured an unprecedented third term at the helm of the Chinese Communist Party and there was no end in sight to his Covid-zero policy. The property bubble was bursting and the Chinese economy was in tatters. Not to mention that the country’s population registered its first annual decline in over six decades.
Yet, despite this grim background, China’s stock market suddenly rebounded. Covid-zero was scrapped entirely and Xi started showing willingness to repair his country’s relations with the West. The stock prices of Baidu, Alibaba, Tencent and many others actually doubled in just three months’ time. China quickly went from “uninvestable” to unmissable.
Should Investors Chase Tencent Stock’s Rally?
However, it seems the market is getting ahead of itself. The companies underpinning China’s economy will take years to recover to their former glory. So instead of chasing this rally, we believe investors should wait for a pullback to join the bulls. The good news is they might not have to wait too long. The 4-hour chart of Tencent shows a ~30% pullback is likely to begin sooner rather than later.
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The sharp surge from HKD 189 in October, 2022, to HKD 417 in late-January, 2023, looks like an almost complete five-wave impulse. The pattern is labeled 1-2-3-4-5, where the five sub-waves of wave 3 are also visible. Wave 5 needs to exceed the top of wave 3 in order to complete the pattern, putting targets above HKD 420 within reach.
The anticipated breakout should be taken with a grain of salt, though. According to the Elliott Wave theory, a three-wave correction follows every impulse. If this count is correct, a notable bearish reversal can be expected to form in Tencent stock soon. Then, a decline back to the support area near HKD 300 would make sense before the uptrend can resume. Investors better wait for this drop and not succumb to the fear of missing out.
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