iQiyi Has a New Short-Seller - What Do the Charts Say About the Stock?

iQiyi has a new short-seller involved in the name, but will the stock suffer the same fate as Luckin Coffee?
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iQiyi  (IQ) - Get Report shares were down 6% in Wednesday trading with the move coming after reports of a new short position from Muddy Waters.

Shares initially sank on the news, falling 17.2% from the session highs at one point, but ended Tuesday’s session higher by 3.2%. If all of this sounds familiar, it’s because it is.

In late January, Muddy Waters issued a short report on Luckin Coffee  (LK) - Get Report and shares were temporarily hammered as a result. However, the stock bounced back as many investors rejected the claims and defended the company.

Lo and behold, Luckin shares are down more than 80% over the past couple of days as reports of fraudulent information have come to light and the company’s accounting is a mess.

Unfortunately in this case, I am better at following price action than I am at forensic accounting. However, the overlaps here - a Muddy Waters short report on a Chinese equity - have to have some investors feeling uneasy. I know I would be thinking twice about sticking with iQiyi, whether the claims turn out to be true or not.

Muddy Waters has taken its stand on iQiyi, but what do the charts say about the stock?

Trading iQiyi Stock

Daily chart of iQiyi stock. 

Daily chart of iQiyi stock. 

When looking at the last 16 months of trading, some very evident points pop out on the daily chart for iQiyi stock.

First, the stock shows a lot of respect for the 200-day moving average. At times, this metric has been very stingy resistance and at other times noteworthy support (depicted on the chart with blue circles). Also clear, is that range resistance sits between $27.50 and $28.

Lastly, iQiyi tends to remain in trend for considerable time, but once that trend breaks traders need to be flexible and exit their respective positions. I’m talking about the breakout over downtrend resistance in early November and the breakdown below uptrend support in early March. Both points marked a huge turning point in the price action.

Lately though, the action has not looked good. At first, iQiyi shares were holding up despite the coronavirus spreading through China. That’s likely as many considered it “the Netflix  (NFLX) - Get Report of China,” and as many readers know, Netflix has been the best-performing FAANG stock this year. So why shouldn't iQiyi?

Despite that early strength though, shares plunged through the 200-day moving average in March, failed to reclaim that mark on the rebound and are now clinging to the $16 area. For obvious reasons, bulls do not want to see IQ lose this level.

For many, the risk of being long is too high and that’s completely acceptable, particularly in this type of market environment. A close below $16 puts the recent low near $14.50 back in play. Below that and iQiyi could drift into no man’s land.

On the upside, the first target is the declining 20-day moving average currently near $18.36, followed by the 200-day moving average.