Wednesday, November 2, 2011

Xinyuan Real Estate's ($XIN) Descending Triangle Part II: The Future

As we noted in our previous post on Xinyuan Real Estate, the stock appears to be stuck in a massive descending triangle dating back to its IPO in 2007.  While a descending triangle is technically bearish, here there are several factors weighing against the bearish interpretation.  The first being that there is little room below for a bearish break of the descending triangle, as the stock is already trading below $2 and the height of the triangle is $14+ from 2007.  Second, the stock has bounced hard off of its long-term lows in October of 2008 and 2011, as well as its secondary lows in November of 2008 and August of 2011.

So if $XIN actually manages to make a bullish break out of the descending triangle, what would that mean for the stock?  Below are two possible breakout scenarios noted on the chart.   


Obviously, these are anticipatory scenarios, and the future will likely not fit neatly in to one of these possibilities.  Nevertheless, you can see that recent price action is starting to lay the groundwork for some potentially bullish scenarios as we approach earnings in the next week or so, which by $XIN's own projection are going to be incredibly strong.  The market may simply be waiting for confirmation that $XIN's revenue and earnings growth is "for real" before finally leaving behind the descending triangle which has kept $XIN pinned down since its IPO. 

As for the scenarios themselves, the purple scenario is a very bullish one that appears to parallel the strong rise the stock experienced in 2009.  While in hindsight the 2009 rise was a "dead cat bounce" rally that merely tested the top of the descending triangle, a 2011-2012 rally might be real if the descending triangle can actually be broken to the upside.

For those who are wondering how a company with such a low P/E, a dividend, strong revenue and earnings growth, and trading way below book value can be so "unfairly" priced by the market, the short answer is the descending triangle dating back to the IPO.   

If the descending triangle is broken, the whacked out valuation of this stock could correct very quickly, even if the general market is tanking ($SPY) as appears plausible right now.  This would be similar to the bullish break of the descending triangle $EBAY broke out of in 2002, as noted on page 127 of Edwards & Magee's 9th Edition of "Technical Analysis of Stock Trends," which led to a very strong upward move from 30 to 57 in about half a year.

Disclosure: Long $XIN

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