Is WINS Finance's Breakout Sustainable?

WINS Finance Holdings Inc. (WINS), a guarantor of small business loans concentrated in the Chinese province of Shanxi, has seen its shares rise a phenomenal 737% since November 11, 2015. With a $6.8 billion market capitalization, the stock is significantly overvalued relative to its modest $1.5 million in third quarter revenue and $0.15 per share in earnings, and the company has even admitted as much in a recent press release.

Often times, random micro- and small-cap stocks are targeted by active traders through mistakes that snowballs into something larger. A great example from the past is Tweeter Home Entertainment Group (the ticker was “TWTRQ”), which rose more than 1,000% from $0.01 to $0.15 per share shortly before Twitter Inc.’s (TWTR​) initial public offering. The stock was bought up by scam artists and then promoted in newsletters to unsuspecting investors that bid up the price.

WINS Finance may not be a case of mistaken identity, but it could be similar case of fraudulent activity stemming from its acquisition by Freeman FinTech. According to Barron’s, ten Freeman FinTech managers and directors were sued by Hong Kong’s Securities and Futures Commission for alleged fraud in a previous acquisition. The SFC further requested that the company’s new chairman step down due to a prior stock manipulation.

From a technical perspective, the stock price is approaching the lower trend line of a rising wedge reversal pattern, which is traditionally a bearish chart pattern following a false breakout. Traders should watch for a breakdown from the lower trend line support on higher-than-average volume as confirmation of a reversal, while being aware that the stock could rebound from its lower trend line support in a false breakout.

The chart pattern could be foreshadowing a near-term decline in the share price from its highs as the stock returns to more reasonable valuations of closer to $30 per share rather than over $300 per share – so traders may want to take note. However, short-selling the stock could prove difficult given the relatively low volume and few number of shares available to borrow.

Is WINS Finance's Breakout Sustainable?