Has the Next Leg of the AI Trade Arrived?

• Tencent AI assistant report coincides with China tech rally
• Investors may be looking beyond AI infrastructure
• Breakout attempt underway as Hang Seng tech bulls eye 100DMA

Beyond the AI Buildout?

Chinese technology stocks surged on Tuesday, led by Tencent, Alibaba and Meituan, with a report from the Financial Times that Tencent is close to launching a WeChat AI assistant potentially providing the catalyst for the move.

The assistant is reportedly capable of helping users complete tasks within the platform, potentially providing a glimpse of how AI may be deployed across one of China's largest digital ecosystems. Tencent shares rose 7.8%, while Meituan gained 8.8%, Alibaba climbed 5.7% and Baidu added 3.3%.

Source: TradingView

The move coincided with weakness in several Asian markets that have been major beneficiaries of the AI infrastructure boom. In Korea, Samsung Electro-Mechanics tumbled after a near 700% rally this year, while SK Hynix weakened. In Japan, Tokyo Electron and Disco also slipped.

While one day's price action does not establish a trend, the divergence may suggest investors may be broadening their AI exposure. Until now, much of the enthusiasm has centred on the companies building the chips, memory and infrastructure needed to power AI. Tuesday's move hints investors may also be looking beyond the infrastructure buildout towards companies that may benefit from wider AI adoption.

Breakout Attempt Faces Key Test

Source: TradingView

Hang Seng Tech has broken above its long-running downtrend on the back of the tech rally, with the key 100DMA now located marginally overhead. As seen in May, another breakout attempt above the downtrend stalled at this level, ultimately delivering a false break and rapid unwind over the subsequent sessions. As such, while a close above the October downtrend may start to draw more bulls in from the sidelines, to really validate the breakout, it may require a clean and sustained break above the 100DMA, something that has not been achieved so far this year.

Should bulls get the upper hand above the 100DMA, 5289 was the high set during the false break in May, making it the next level to watch overhead. Beyond, resistance may be encountered at 5422 and 5523, with the latter now bolstered by the encroaching 200DMA.

Should this breakout attempt prove to be another failure, 5020 down to 5000 has seen plenty of price action on either side recently, putting it on the radar should the price slide back beneath the downtrend. Beyond, 4800 has brought out the buyers recently, making it the next downside level of note.

A reacceleration higher in the oscillators suggests bullish strength is starting to build again, with RSI (14) now sitting above 50 while MACD has crossed the signal line and also flipped positive. A continuation of these trends would swing the near-term directional bias firmly higher, whereas for now they remain in relatively neutral territory.