25 Feb

Sympathy Play Explained – China Small Cap Stocks


Stocks are pushing higher this afternoon after President Trump announced on Twitter that he’ll delay imposing tariffs on China (extending the March 1st deadline) because negotiations are going well.

Now, I’m not into politics much… but I am into catalysts.

A catalyst is an event that causes a stock (or group of stocks) to experience above-average trading volume and volatility (price action).

That said, my focus is on trading small-cap stocks primarily priced under $10. I like trading off three simple chart patterns. I call them “fish hook”, “rockets”, and the “rest and retest.”

Of course, the patterns alone won’t make me get into a trade, there needs to be a catalyst too. Furthermore, the risk vs. reward on the trade must be stacked in my favor (value).

How’s it been working for me?

(Click here to find out how my top strategies work and how you can apply them to your trading)

Pretty darn well, thanks for asking.

Now, I’m a teacher at heart.  But I’m so confident that my strategies work that I put my real money on the line… every day… to show you how you can do it too.

However, my greatest enjoyment comes when my clients transition from learning to earning.

Like Rob:

Now, if you’re new to small-cap stock trading, one thing you’ll notice is that they are more volatile than large-cap stocks. (That’s a good thing because we need stocks to move enough to make quick profits).  

It makes sense, a company like Microsoft has dozens and dozens of analysts that track its stock. Furthermore, it’s hard for investors to be caught by surprise when there are so many eyes on the company.  

On the other hand, most of the small-cap stocks I trade are often neglected and overlooked by Wall Street. That said, when a catalyst hits… these stocks tend to move fast and far.

There are thousands of publicly traded stocks in the market. And there are always stocks that are moving, regardless of what the overall market is doing.

And if you’re wondering what’s moving today, it’s small-cap Chinese stocks. Last night’s comments by the President has awakened this group of stocks, and they are now rocking.  

And you know what else?

It’s not just one stock moving, there are several in the group that is. You see, if one of these stocks moves fast…the rest will follow.  

Because all the FOMO traders are trying to pile and catch the next wave. In the trading world, they call these sympathy plays.  

I’m Watching These Stocks With This Catalyst…

If you’re wondering about what small cap stocks I’m watching… well, they’re China-related. Now, I focus on Patterns, Value, and Catalysts. When there’s a catalyst of this magnitude… these stocks can’t be ignored.

Stocks across the globe are strong after the President of the U.S. (POTUS) postponed the trade deadline for raising tariffs on Chinese imports. It’s giving the markets a clue as to where the U.S. and China stand in the trade-talk process. That said, this news could bring momentum to China small cap stocks. You see, this catalyst doesn’t only affect large Chinese stocks like Alibaba (BABA) and Baidu (BIDU), there’s actually a trickle-down effect. In the markets, we call this “sympathy”.

Sympathy Trade Explained

Now, small cap stocks tend to move in sympathy more than large cap stocks. Remember the whole cannabis craze? Well, nearly all of those cannabis stocks moved in sympathy together. Artificial intelligence stocks also moved in sympathy together… the list goes on.

Here’s what I mean:

sympathy play cgc stock cron stock

If you look at the daily chart above of Canopy Growth (CGC) – the candlesticks are the performance of CGC stock- and Cronos Group (CRON) – the line chart overlay – you’ll notice they trade together. However, CGC stock is the clear leader in the space, so you can see how CRON stock follows the way CGC does.

The whole idea is to find a leader and see which stocks trade with it. The stocks that move in sympathy are considered laggards. Now, the leaders that I mentioned earlier didn’t move a whole lot… the reason being: they have massive market caps. That said, it’s hard for these stocks to move 20% or more in a day.

However, with small cap stocks, it’s not hard for a Chinese stock to move say 30%+ on this news.

Now, with this catalyst combined with my three patterns… it wouldn’t be crazy to see one of these stocks run higher.

China Small Cap Stocks to Watch

Here’s what I’ve been looking at in terms of China stocks on this U.S. – China trade news.

First, there’s China Ceramics Co. (CCCL):

If you don’t already know, I actually traded CCCL stock last month off of the Fibonacci retracement pattern. So these levels are still to be respected since they haven’t been broken yet.

More specifically, I’m watching for a continuation pattern now in CCCL stock.

CCCL stock has been consolidating for quite some time now…

china trade deal small cap stocks sympathy play cccl stock

Moving on… I’m also watching ChinaNet Online Holdings (CNET) because it’s exhibiting another one of my patterns: the bull flag continuation.

Check out the daily chart on CNET stock below.

china trade deal small cap stocks sympathy play cnet stock

Now, CNET stock ran up and has been trading in a range. The runup, as shown in the yellow box is what I call the “road trip”… and the two blue horizontal lines in which the stock has been trading between is known as the “rest stop”. Generally, when we see this pattern coupled with a catalyst, the stock has a high probability of breaking out and continuing its “road trip”.

Of course, no one knows exactly how long this group will run. But if it’s a strong enough catalyst, these stocks could be in-play for a number of days. I’ll keep you posted on how I decide to trade these stocks. But if you want to see how its done in real-time, check this out.

The diary of a real $ trader,

Jason Bond


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