We are considering a short-term trade on FUTU due to the technical setup.
Quick Overview:
Futu Limited (FUTU) is a holding company that operates in Hong Kong. They are an online broker and wealth management platform that provides a one-stop ecosystem for investors. They provides news, market data, trading services, wealth management for Mainland China, Singapore, Hong Kong and U.S. equity markets. They even own a popular social media platform for investors.
There is nothing disruptive or technologically unique about Futu. It operates as a relatively standard online broker, much like the online options we have in the U.S. What differentiates it from other the well-known brokerage firms is its location and timing.
Since the March 2020 crash, we have seen a relative explosion of retail interest in stocks. This retail interest in equities is a global phenomenon, including China. China’s stock markets have been open for just over 30 years, compared to the U.S. that has been in operation for 229 years. As a result, in the mature U.S. equity markets, about 52% of Americans participate in the stocks markets, compared to about 13% in China. This number is up nearly 7% from a year ago.
With the growth of China’s wealth coupled with the opening of the tech focused Star Market in China, the interest in equity markets is only expected to increase, which should bode well for FUTU.
This growth shows within Futu’s projected revenue growth. It’s expected to grow revenue by 164% this year from $337M to $891M, although the 1-year forward is around 50% projected growth from $891M to $1.32B for FY2022. We will see in time if the estimates will be revised or if Futu is having its breakout year and growth will level off quickly.
Futu has strong growth this year, however, it is not anchored by a long-lasting microtrend. Instead, it’s riding the popular trend of Chinese stock investing. As long as the Chinese stock markets perform well, we believe the interest and growth in Chinese equities will continue to grow. Gains attract more retail investors, and Futu has a strong competitive edge for retail Chinese investors.
The story is not one that we would consider for the I/O Fund’s LTBH or even a longer-term momentum position. What we mainly like about Futu is its current technical setup. We like it enough to write-up a quick chart and consider taking a swing trade. We will set an initial stop to protect our losses, just in case our timing is off, and we will look to exit into strength when we believe the trend is coming to an end.
We believe FUTU is about to breakout and into the 5th wave (red count) within a larger 3rd wave (green count). The 5th wave within 3rd waves tends to extend, especially in high growth names like FUTU.
Also, note the RSI pattern. It’s flashing a reversal warning (the RSI is making a higher high, while the price is making a lower high). This, I believe, will setup for a drawdown into the $135-$125 region. It will also setup a nice inverse head and shoulders pattern just below the primary breakout price at $169.
We will look to buy on the coming pullback, or a breakout above $169. We will use a stop to limit our loss, and seek the targets overhead.