Friday, November 18, 2011

Xinyuan Real Estate: Inverse Head and Shoulders Possible

We have devoted several recent posts to looking at the technical analysis picture of Xinyuan Real Estate ($XIN), to try to determine if technical factors might be part of the stock's apparently out-of-whack valuation (P/E of 1.4, significant discount to book and to peers in the US and Asia, etc.).  We have noted that $XIN seems to be stuck in a long-term descending triangle pattern dating back to the IPO in 2007.

A descending triangle pattern is bearish, and suggests that further price decreases could be in store if $XIN falls below 1.54.  But at this point, with such a low price for the bottom of the trendline, fundamental factors, and the fact that the triangle is narrowing so fast at this point, it seems that the likelier move is for $XIN to make an upward break of the triangle.

How might such an upward break occur?  The most powerful break would occur with a classic reversal pattern, such as a head and shoulders bottom (inverse head and shoulders).  There are two possible head and shoulders bottoms forming on $XIN's chart currently.

As can be seen in the chart, $XIN has already completed the first shoulder and possibly the head in this pattern (if the purple neck line is used).  If $XIN makes a move through the purple neck line (see the purple arrow), it will be crucial to track volume to see whether this is "the" completion of the head and shoulders bottom or not.

If there is not a significant uptick in volume on a break of the purple line, it is likely that $XIN will need to bounce off and then through the black neck line (which conveniently is also the descending triangle upper trendline in the first chart shown above) in order to complete a head and shoulders reversal pattern.  See the black arrow for what this pattern might look like.  As you can see from the chart, if such a reversal pattern is going to play out, it is likely to do so before the end of the year. 

Either way, as we have noted several times in prior posts, $XIN seems headed for a showdown with the black neck line.  If it fails to break through (either on the first or second attempt, depending on how the head and shoulders pattern is played out), look for a retest of the long-term lows.

Disclosure : Long $XIN

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