Alibaba Group (BABA) is a bit of a hot mess these days.
After staging a successful coup on the heels of an earnings surprise in early May, the bulls have stumbled. BABA stock is now 10% off its highs and things will turn nasty quickly if buyers don’t materialize in force.
What’s particularly disappointing about the recent sell-fest is that it completely upended the long awaited trend reversal in Alibaba Group. What could have been a clean return to a strong uptrend has turned into a sloppy tug-of-war.
Shareholders vying for a recovery in Alibaba’s stock price to the coveted land north of the century mark will have to place their dreams on hold for a bit.
At $86 BABA stock is at an interesting crossroads. As a quick glance of its price chart will attest there is a healthy amount of price memory in this zone. Through February, March, and April the $86 level offered resistance aplenty.
The earnings jump in May finally vaulted Alibaba shares above the stubborn ceiling and it’s acted as support ever since. Coincidentally, the 50-day moving average also calls the $86 level home.
If there was ever a time for BABA bulls to stand up and shout, “no mas”‘ it’s now. A successful break of this zone invalidates just about every bullish development of the past month and will turn the stock into an uninspiring hodgepodge of candlesticks.
Pick Your Poison with Alibaba Stock Options
Those looking to trade off of the $86 level have one of two choices. Cast lots with the bulls and bet on a successful bounce from here. Or, wait for a break below support and play for a gap fill towards $80 along with the bears.
Bulls can buy the Jul $85/$90 call spread for around $2. The risk is limited to the initial $2 debit and will be lost if BABA sits below $85 at expiration. The reward is limited to the distance between strikes minus the net debit, or $3, and will be captured if BABA can rise above $90 by expiration.
Bears can buy the Jul $85/$80 put spread for around $1.50. The risk is limited to the initial $1.50 debit and will be lost if BABA sits above $85 at expiration. The reward is limited to the distance between strikes minus the net debit, or $3.50, and will be captured if BABA can fall below $80 by expiration.
At the time of this writing Tyler Craig owned bullish positions on BABA.
