Shares of Alibaba Group Holding Ltd (NYSE:BABA) have been in a real house of pain since topping out in November, but after the weak reaction to last week’s earnings, traders at least now have well-defined support and resistance to trade against.
For the latest quarter, Alibaba earnings came to 81 cents per share excluding certain items, and that topped the consensus expectation for 75 cents. Revenues of $4.22 billion just missed a bar set at $4.45 billion, but still represented 40% growth year-over-year. Active user growth was also impressive as it rose to 265 million in the last quarter, up from 136 million in the same period one year ago.
All in all, investors really just seemed to be focused on that disappointing revenue number.
The last time I discussed a potential trade setup in BABA stock was on Dec. 18 when the stock showed some strength and had overcome its near-term technical headwind. The trade did not work as sellers quickly stepped back in and pushed the stock lower to my discussed stop-loss level at $105.50. After this bearish reversal, the stock only saw further weakness and any bounces were sold.
BABA Stock Charts
Looking at the daily chart that stretches back to the company’s initial public offering date last September, the sharp mid-October to mid-November rally has almost fully retraced. There was a band of support (blue box) between $96 and $100, but after a mid-January bounce off this level, BABA stock sliced through it last Thursday as a result of the weak reaction to the earnings report.
Last week’s selloff in Alibaba now has the stock sitting below levels from its first day of trading since October. In other words, the post-IPO exuberance in BABA stock has now completely deflated … though that might be a reason to reconsider the stock.
When we zoom in on the price action of Alibaba stock from last Thursday and Friday, we see that it has now formed a nice and tight trading range between about $87.30 on the low end and $92 on the upper end. This now sets up a classic post-earnings trade.
Either the stock can overcome the $92 area and begin to move higher to fill at least a part of last week’s down-gap into the mid- to high $90s, or the stock drops below last week’s lows for an move into the low $80s (i.e., a re-test of last October’s lows).
In either case, the levels are clearly marked, which for risk management purposes is what active traders like to see.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.
