Chinese Takeout

August 23, 2022 8:00 a.m. EDT

(24/7 MARKET NEWS) – Just as a number of Chinese companies, which refused to properly report their financial statements, are delisting from the NYSE and NASDAQ, there’s been a mad rush to IPO a slew of sketchy Asian listings, mostly from Hong Kong.

These seem to follow a similar pattern, including being pumped up during the premarket, so that inflated shares can be dumped on Americans during the regular trading sessions. This happens for a few days or even weeks and then, probably after the insiders have sold their shares, they pull the plug, which is the Chinese Takeout move, where unsuspecting bagholders overpay for shares from the Company insiders.

Last week I noticed that one of the latest plays, GigaCloud Technology (NASDAQ: GCT) was making a powerful upswing. After hitting a low of $24.81, the Chinese based listing bounced back to $27.84 and I thought that booking a quick 10-30% profit on the move was the best strategy.

Well, it turns out that it actually doubled from where I noticed its move higher, but I will reiterate that the smart money plays these quick moves and sleep well at night. Anyone who purchased a thousand shares and locked in $2,500 to over $8,000, for a few hours or less, had a great weekend.

Shortly after noon yesterday, I saw that it was in the $32 range and thought it could make a nice and quick scalp move, but, rather than report that, I thought that it would be better to go into a little more detail on the Chinese Takeout trade.

We’ve all heard the adage “if you don’t know who the bag-holder is, you’re the bag-holder” and all of these recent IPOs have that feel about them, which doesn’t mean that traders can’t make fat stacks from these Chinese Takeouts, but investors shouldn’t take a position in one of these without understanding the additional BUYER BEWARE dynamics that are in play.

In my opinion, for those who are brave enough to play these, it’s best to blend the scalp trade and swing trade approach. In other words, play the technical trend move without holding past the close of the regular market hours. Yes, I know that the traders may miss out on the premarket moves that these can make, but it’s better to be able to sleep well at night. By the way, for those unfamiliar with the terms, scalping is a day trading strategy where a day trader will make dozens or even hundreds of briefly held intraday trades in the same stock, while swing trades are also technical trades, but are typically held for a few days to a few weeks.

Long term shareholders may hate to watch scalpers making their little spread trades, over-and-over, but that’s an effective strategy. Rather than falling in love with a stock, the scalpers rack up many mostly profitable trades that are also low risk, because they don’t want to become bagholders, like so many recent $HKD and $MEGL investors.

Another proven strategy is trading around your core position; meaning that when a trader believes their pick is going to the moon, they will let part of the shares in that listing ride, but trade the other shares in the same listing.

What if this gaps up this morning?

No problem, just look for another buy the dip entry purchase, tack on another 10-30% and be happy with the extra trade; same thing goes for those trading around their core.

What if I miss out on the next $HKD or $MEGL?

Again, no problem, keep trading it, but one must ask the following question, “If these are really $170 or $2,500 stocks, why do they go straight up and then drop like a rock and are you sure that you’ll be able to sell before you become a bag-holder?”

In order to believe that these are really $2,500 stocks, you have to also believe that the investment bankers are gifting the public billions of dollars. Seriously, just that one data point is case closed proof that these will not have staying power. Of course, wise investment bankers price their IPOs with some upside, to generate additional publicity and interest, so that they can continue to run their stock, but they’re not going to leave billions on the table on these deals.

Speaking of missing $HKD, $MEGL, or the next hype play, thousands of investors who bought into the hype near the top, as well as those who, for whatever reason, just weren’t in front of their trading screen when the bottom dropped out of those. We want to avoid joining them.

In general, you should not trade without employing a preset stop loss, but, with these Chinese IPOs and momentum plays, you cannot trade without having a preset stoploss in mind and honoring the stoploss. In most cases, you probably don’t want to post it, because the market makers will swipe it from you, but, regardless of whether it’s a set price, percentage, trailing stoploss, or some other strategy, honor the mental stoploss strategy.

While many retail investors will be comforted to see that the new listings have low floats and lock up periods, but is there any way to be sure that the insiders aren’t selling their shares short, now, which they can cover when the lockup period expires?

Starbox (STBX) is scheduled to be the next Asian IPO. Since it’s based in Malaysia it may be different, but, by now, the Asians must think that American traders are crackheads, so expect more of the same.

Don’t be greedy, don’t get caught up in the fear of missing out, or buy into other delusions. Take your profits while you can.

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