The S&P 500 took a well-deserved breather Wednesday, finishing the day up a scant 0.08%. The neutral day developed a doji candle, suggesting buyers are running out of steam.
Fortunately for Chinese stock lovers, Alibaba Group Holding Ltd (BABA) wasn’t having any of that neutrality business. No, no. BABA stock beckoned to bulls, one and all, looking for some momentum on an otherwise dismal day.
And boy did they respond. Alibaba stock popped more than 2%, taking out key resistance in the process. ‘Twas a breakout six weeks in the making.
The price surge was accompanied by notable volume, lending legitimacy to the move. Chart watchers love to see heavy volume backing a breakout, as it increases the likelihood the resistance breach sticks — and helps deliver follow-through in the days ahead.
And it’s not just Wednesday’s volume that’s aiding the bulls. Ever since the early February low in BABA stock at $60, its ascent has been littered with accumulation days. I count no less than nine such high-volume up days.
On the price front, there’s nothing not to like. BABA is perched above all major moving averages and little overhead resistance remains until the $86 level. With the stock closing around $81 yesterday, that means shareholders are looking at the potential for $5 more upside before any major ceilings come into play.
Alibaba reports earnings on May 5, so traders have two weeks to capitalize on the breakout before a wrench is thrown into the chart.
The BABA Breakout Trade
The July $80 calls suggested in last week’s article are now sitting at $4.60. Snatch ’em up if you think BABA stock continues running towards the $85 level. The reward is unlimited, the risk limited to the initial $4.60 debit.
Of course, you’ll only incur the max loss if you hold all the way to July expiration and Alibaba stock is below $80.
Traders wishing to sidestep the earnings drama should exit the trade before the close on May 4.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
