I still may not know “Jack” about the financial intricacies and inner workings massive Chinese e-commerce operator Alibaba Group Holding Ltd (NYSE:BABA), but I do know price charts and options. And based on those, BABA stock is setting up nicely for the bulls.
They say timing is everything, but if you’re an options trader, the strategy is equally important. As this relates to Alibaba, we accomplished both in spades when we wrote about the stock back in mid-March.
In a nutshell, shares of Alibaba were breaking out of a technical base in the absence of news. In fact, propagandist headlines warning of the bearish impact of rising U.S. interest rates on Chinese equities, as well as an economic conundrum tied to growth stabilization and of China’s own making, were all the rage.
The narrative at the time made BABA stock a seemingly poor bull play. Yet fast forward to today, and shares are up 14% and handily outperforming U.S. markets — as well as the iShares FTSE/Xinhua China 25 Index (ETF) (NYSEARCA:FXI), which is up less than 2%!
So what happened?
It’s hard to say for sure, but the importance of a specific theme tends to wear off over time. As InvestorPlace’s Tom Taulli recently discussed, maybe traders decided over the last two months to optimistically embrace Alibaba’s massive appeal as “China’s Amazon.”
But where does this leave Alibaba for now? Well, following its staunch rally, it’s probably time for a truce between the bulls and the bears.
BABA Stock Chart
Click to Enlarge As Alibaba’s weekly chart reflects, 2017 has been a very nice extension of 2016’s bullish trend change from a corrective double bottom pattern. BABA shares are now up 36% year-to-date and have taken on a position of leadership relative to FXI in recent weeks.
However, I expect a period of profit-taking to emerge in the near-term.
Stochastics have been overbought for an extended period, while shares have remained glued to the upper Bollinger Band the past couple months. As this action coincides with a breakthrough of Alibaba’s all-time high sent in 2014, I’m anticipating a modest bit of technical backing and filling before a cup breakout reveals itself.
How to Trade Alibaba
I want to approach BABA stock as a pullback play with a put credit spread. But in this case, it’s not that simple, as Alibaba reports fiscal fourth-quarter earnings later this week.