The pain in Alibaba Group Holding Ltd (BABA) continued this week. Another disappointing earnings announcement delivered a 6% haircut overnight, sending the Chinese e-commerce company to yet another all-time low.
And yet, hope springs eternal.
Rather than plumbing new depths following the earnings down-gap Alibaba stock is popping back nicely. The demand surge could be simply be a bout of profit-taking from short sellers looking to lock in their good fortune. Or perhaps the sale in BABA shares has gotten tempting enough to attract a bargain hunter or two.
Regardless, BABA stock is attempting to claw its way back.
I suppose the question of interest, then, is whether or not it’s worth betting on a BABA bottom here.
Aside from the fact that the stock has fallen dramatically and is reacting well following earnings, I find little evidence that a bottom is being carved out. Prices remain firmly below all major moving averages, with resistance levels aplenty looming overhead.
The bulls have some serious work to do before BABA stock begins to look healthy on a technical basis.
Click to Enlarge
The $79/$80 zone provided some significant support on the way down, so I suspect it will prove stiff resistance if the rally continues a bit further.
Bottom line: The odds favor being a seller of this BABA bounce.
Join the BABA Bears
Sell the Sep $80/$85 call spread for 50 cents. Consider it a bet BABA stock fails to climb above $80 by September expiration.
Provided the calls expire worthless, you will pocket the max reward of 57 cents.
The max risk is limited to the distance between strikes minus the net credit, or $4.43, and will be lost if BABA sits atop $85 at September expiration.
To minimize the loss you could exit the trade if Alibaba stock rises above either the short strike put at $80, or the falling 50-day moving average near $82.25.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
