It has been two years since we’ve seen this setup. But it’s happening again right now…

Hong Kong stocks have been falling for months. The negative headlines surrounding China recently took a toll on Hong Kong stocks as well… And the downturn picked up speed last month.

The iShares MSCI Hong Kong Fund (EWH) dropped 9% in the course of a week. And the fund hit a rare setup in the process.

Again, this hasn’t happened in years. But as I’ll share today, it’s setting up a trading opportunity that could lead to major outperformance in the short term.

Here are the details…

It’s almost always smarter to buy into strong trends. Stocks moving higher tend to keep moving higher. But every once in a while, you can catch a beaten-down market and safely make short-term gains.

That’s what’s possible today in Hong Kong stocks. And it’s happening because the recent fall in EWH moved the Hong Kong stocks into oversold territory.

We can see this through the relative strength index (“RSI”). It’s a simple measure that alerts us when a market falls too far, too fast.

When that happens, the RSI will decline. And if it falls below a level of 30, we consider it oversold. That typically means that a snap back in the opposite direction is likely.

Today’s case is even crazier, though. EWH didn’t just fall below an RSI of 30. It fell to an RSI of 17 last month. That’s the lowest reading since August 2019. Take a look..

EWH didn’t even drop below an RSI of 20 during the depths of the COVID-19 pandemic. And it has only fallen below that mark five other times outside of today.

Importantly, when EWH falls below and rises back above an RSI of 20, a short-term rally usually follows. Check it out…

Since 2000, EWH has returned less than 1% in a typical three-month period. But buying once it rises back above an RSI of 20 leads to better results…

Setups like this have led to 4% gains in one month and 7% gains in three months. That’s an impressive return in a short window.

Importantly, EWH’s RSI is already on the rise. It jumped above 20 last month and has kept moving higher. Shares haven’t taken off yet, though. And that means you still have a chance to jump on this trade.

Again, remember, this is a short-term trade setup… It isn’t a reason to buy and hold Hong Kong stocks for years. But if you’re looking to make a trade outside the U.S., shares of EWH are worth considering today.

Good investing,

— Chris Igou

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Source: Daily Wealth