There’s little doubt iQIYI (NASDAQ:IQ) has taken a successful script used by U.S. tech giants into China. But IQ stock is set up nicely for a bearish short thanks to its pricey cost of doing business and the fact that investors already refusing to recommend it.
It has been hailed as China’s Netflix (NASDAQ:NFLX), and rightfully so. Not only is it a streaming provider itself, but it’s also taking a deep dive into the ever-increasing original content demanded by consumers.
IQ stock also has a lot in common with Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL). As InvestorPlace’s James Brumley noted recently, in addition to its platform for streaming theatrical content, iQIYI’s user-generated content and video advertising business look very similar to Alphabet’s YouTube.
Still, despite the similarities to Netflix and Alphabet and inclination toward success, there are no guarantees what’s worked so well for those companies will bear fruit for iQIYI.
From rocketing costs and mounting losses tied to making original content, to iQIYI’s business being challenged by China’s slowing economy and indigenous heavyweight competition from Tencent (OTCMKTS:TCEHY) and Alibaba (NYSE:BABA), it could be a tough road ahead for IQ stock. And that difficulty was hinted at by April’s mixed and concerning operating results.
IQ Stock Weekly Chart
Prior to IQ stock’s Q1 report, shares were successfully testing a 62% Fibonacci level attached to December’s all-time-low and an undercut variation on the classic double-bottom pattern. But earnings produced the equivalent of a shot over the bow for iQIYI bulls.
The failure to hold the 62% retracement level is one that many technicians see as a warning of continued weakness and ultimately, a full-blown challenge of the cycle low. In the case of IQ stock, this would mean a test of the undercut double-bottom. That’s roughly 18% – 19% below today’s share price. Furthermore, whether that price action would result in some sort of meaningful bottom is anybody’s guess.
As such, the case for shorting IQ stock within its existing bearish trend does maintain some obvious support. Backing up this position, shares this week have also breached the lesser 76% level while taking out a two-week doji and inside candlestick bottoming pattern.
If traders are comfortable with the risks inherent in shorting a more volatile stock like IQ, the suggestion is to use a 10% stop-loss. That’s an exit that makes sense. It also makes sense knowing today’s bearish storyline, just like with NFLX stock, could always be up for a more enthusiastic rewrite in the months ahead.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. . For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.