The fact that China’s iQiyi (NASDAQ:IQ) is being compared to Netflix (NASDAQ:NFLX) is an accolade in and of itself. Netflix dominates the western hemisphere’s OTTV market. IQ stock, however, has been uncomfortably tough to stick with after its post-IPO peak in June. Shares are down more than 50% from that high and are still within striking distance of new multi-month lows.
There’s a silver lining behind the cloud, however. That is, iQiyi stock has traveled lower over the course of the past five months within the confines of a well-defined trading range. With little room left to bounce around in between its floor and ceiling, however, we may finally be at a turning point.
The impending turn will probably be in a bullish direction.
Lines in the Sand
iQiyi isn’t a household name in North America for a couple of good reasons. The biggest one of them is that it’s intended for China’s television watchers. The second is it’s still quite young as a publicly-traded company, with former parent Baidu (NASDAQ:BIDU) only divesting it by taking it public in March of this year.
Though not a new entity, IQ stock has followed a path all too familiar to investors who’ve kept close tabs on new issues. Like so many others, this one got started with a bang, racing from an issue price of $18 to a high of $46.23 in June.
Also like so many others, as the euphoria wore off and profit-taking set in, iQiyi stock has made a pretty steady downtrend all the way to its current price of $21.17.
The pullback hasn’t been a haphazard one, however. In fact, it’s been oddly well framed, finding floors as if scripted, and bumping into discernible ceilings.
The end result is a pattern called a converging wedge, plotted with white dashed lines on the nearby chart. There are two floors and two ceilings, but all four lines have been working together. Notice how there’s increasingly less room for iQiyi to trade. One way or another, something’s got to give soon.
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The chart’s nuances are ideal for would-be buyers who’ve been waiting on the sidelines to step into IQ stock. Shares will have to hurdle both of the technical ceilings above it to confirm it’s truly in a new uptrend. Anything less, and it’s a trade just based on hope.
The 20-day moving average line, plotted in blue, is another interim resistance level to watch.
But, it’s not a perfect setup from a chart technician’s perspective. Though the converging support and resistance lines offer a great deal of information (even to true long-term investors), the daily volume has been thinning.
More often than not we see bullish or bearish volume at least start to swell a little before a stock breaks free from a trading range. In this case, more and more people are heading to the sidelines, waiting for someone else make the first move. Until more traders start to commit, shares could keep drifting lower at this tepid pace.
That’s the long way of saying keep an eye on the daily volume.
There’s an X-factor also in play here, however, that may also shed some light on the growing lack of interest. That is, back on Sept. 25 the lockup period for any insider and IPO investors ended. Such an event can and often does open the selling floodgates and speculative buyers “cash out.”
We’ve still not seen any major swell of selling volume though, leaving smart investors wondering if there’s still a small army of investors with their fingers on the sell button should things take a turn for the worse.
Or, maybe all those initial buyers are really in iQiyi for the long haul.
Bottom Line for IQ Stock
Whatever’s in the cards, this is scenario where the chart offers up pretty clear details about what investors are thinking, and how what they’re thinking is evolving.
If and when IQ stock breaks out of either side of the wedge pattern, it’s a clue to take very seriously. And, given how rapidly iQiyi is growing its top and bottom lines, it’s difficult not to expect the break out of the wedge pattern to be in a bullish direction.
A renewed bullish undertow for Chinese and/or American stocks only adds to the potential of a breakout.
But, first things first.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.