Earlier this month, shares of Alibaba Group Holding Ltd (NYSE:BABA) soared higher on better-than-expected earnings. Analysts’ earnings estimates were smashed in epic fashion.
Actual earnings came in at 74 cents and the flurry of buying that ensued sent BABA stock to within a pebble toss of the century mark.
Since then, shares have been digesting their gains in bullish fashion. Indeed, BABA buyers have hoisted their banner atop the flagpole, where it currently sits, waving in the wind for all to see.
With the bull flag pattern nearing completion, now is as good a time as any to look for new trades in the Chinese e-commerce company.
The flag’s appeal is bolstered by the lack of volume accompanying its formation. The best-case scenario for any stock following such a gargantuan gain is a low-volume churn or slight pullback as weak hands take profits and new buyers emerge to join the bullish trend.
The lack of heavy selling indicates the absence of major distribution, which makes it all the more likely the stock heads higher once the digestion phase is completed.
A second dynamic signaling Alibaba stock’s next advance is nigh is the catching up of the 20-day moving average. With this short-term smoothing mechanism now looming closely, the overbought pressures plaguing the stock following its earlier moonshot have all but dissipated.
The BABA Stock Trade
If you think BABA has the mustard to tag the $100 level over the coming month, consider this bull call spread play. Buy to open the Oct $95 call while selling to open the Oct $100 call. The vertical spread can be initiated for around $2.10 right now. The risk is capped at the initial debit and will be forfeited if Alibaba stock sits below $95 at expiration.
The max reward is limited to the distance between strikes minus the initial debit, or $2.90, and will be captured if the stock sits above $100 at expiration.
At the time of this writing Tyler Craig had no positions in any of the aforementioned securities.
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