China Finance Online Co. Limited (JRJC) is a web-based financial services company that provides Chinese retail investors with online access...

Weekly Superstock Scan 15 Feb 2016 - 19 Feb 2016

China Finance Online Co. Limited (JRJC) is a web-based financial services company that provides Chinese retail investors with online access to securities and commodities trading, wealth management products, investment advisory services, as well as financial database and analytics services to institutional customers. Financial services, which include equity and commodities brokerage services, contributes to more than 80 per cent of JRJC's revenue in Q3 2015.


Breakout on Strong Volume and Retrace on Light

In mid-December 2015, stock price of JRJC broke above $4.50 with ten times average weekly volume. The breakout was from a three-month triangular base and from the 30 week moving average. Subsequently, volume dried up as price retraced. At the time of writing, JRJC is trading at $4.52, just above the $4.50 support level.

Prior Superstock

JRJC is no stranger to superperformance. In July 2013, JRJC surged seven times in five months. In May 2014, JRJC quadrupled in just a period of four months. JRJC gave back most of its gains shortly in both instances. But momentum traders may still keep JRJC in their radar and create a third superperformance stint for the stock. Selling the stock at the right time will be key if this happens.

Clearly Defined Confluence Area

The $4.50 level is an important area (support/resistance is hardly exact to the cent) for JRJC. In June 2014 to August 2014, 4.5 serve as resistance. Between October 2014 and July 2015, 4.5 served as a very strong support on many occasions.  After price broke below in August 2015, 4.5 again served as resistance till the most recent breakout. Now that price is trading above 4.5 again, we are expecting 4.5 to hold as a resistance for some time. Price has already bounced off 4.5 once in mid-January. With price trading so near to the confluence area now, it is interesting to see if 4.5 will serve as a support once again.

Having a clearly defined confluence area increases the odds when buying above the area and selling below the area. It also helps to identify a low risk-reward entry as the risk is clearly defined by the confluence area.


Earnings Surge Supported by Increased Revenue

In the latest quarter, JRJC reported an earning of 39 cents per ADR shares compared to a loss of 11 cents in the third quarter a year ago. The earnings surge is supported by a revenue growth of 75 per cent year on year. The growth is attributed to the newly launched heavy oil brokerage business. JRJC has clearly benefited from the recent volatility in oil price.

In the past few months, precious metals have also seen an increase in volatility. JRJC may once again benefit from it.

JRJC has not been a consistently profitable company. It is comforting that JRJC has managed to report two consecutive quarters of profit after a long hiatus. It is poised to report a profitable year for FY 2015, the first time since 2010.

iTouGu and Yinglibao Provide Future Catalysts

iTouGu is an online securities investment service platform which was launched in May 2015. It is designed to meet the needs of individual investors for professional advisors to help them make informed trading decisions. In four months, it has acquired over 2,000 securities investment advisors and 3.5 million activated users.

Yinglibao is a one-stop mutual fund investment platform which integrates cash management solution and mutual fund distribution.

These two products are currently the focus of the company. JRJC has divested to reinvest in iTouGu and Yinglibao. In addition, JRJC's core website will also be redesigned to be a more transaction-oriented information platform that will better integrate iTouGu and Yinglibao. If iTouGu and Yinglibao can continue to gain traction, it will provide the catalyst for JRJC's future growth should its commodities trading business slow down when volatility in the the market falls.

Low Float

JRJC's float is small at 11 million shares. In the past three months, average daily volume is around 400,000 shares. This puts the float at just 27 times average trading volume. With this low ratio, price is expected to be very volatile with surprises. With a positive surprise, JRJC is likely to have a third stint of superperformance in three years. With a negative surprise, we must ensure that we are protected with a tight stop below the confluence area.

Risk Factors/ Things I do not like

  • China Economy - JRJC's business is highly dependent on China's economy and to a lower extend, the world economy. China's economy is already showing signs of weakness. Trading volume will be lower in a bearish environment. Demand for financial information may also slow down as a result.
  • Fraud - China's firms have been notorious in areas of accounting and governance. GeoInvesting has written a report speculating legal troubles of JRJC.
  • Overhead Supply - A prior superstock attracts momentum trader but creates significant overhead supply. During the superperformance phase, there are buyers who bought at $7 - $12 and held on to the stock despite the deep correction. If JRJC does surge again, these buyers will be looking to offload their stock, slowing the stock's advance.

Potential Trade Setup

Since we are so close to the 4.5 confluence area, we are near a buy point. However, the stock is in a short term down trend and we do not want to end up catching a falling knife.

I will wait to see if 4.5 will serve as a support again and trade with the trend. This will mean that I will enter the trade when price breaks above last week's high. For a more aggressive entry, I will enter above last Friday's high.

5ER.SI (Posted on 31st Jan 2016 Watchlist)
Volume has dried up completely. Will drop if liquidity remains low.

EDUC (Posted on 24th Jan 2016 Watchlist)
Closed tight. Can enter now.

DRD (Posted on 17th Jan 2016 Watchlist)
Missed the trade.

VRA (Posted on 11th Jan 2016 Watchlist)
Entered @ 14.4

IESC (Posted on 28th Dec 2015 Watchlist)
Retraced and reported good results. Will post separate updates.

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