Alibaba Group Holding Ltd (NYSE:BABA) shares are tumbling in Thursday’s early morning trading. Thus far, the selling sortie has taken BABA stock down 3.6% on heavy volume. The downdraft marks a mild change in character for Alibaba. For months, strength has been its watchword. Buyers have sallied forth on each and every dip.
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Alibaba stock actually has been a great case study on the effectiveness of the 20-day moving average (red line in chart). Bulls have diligently defended this oft-watched smoothing mechanism with nary a misstep. Should this morning’s sell-fest persist a bit longer, their mettle will be tested once more.
As with any uptrend, however, a breach of the 20-day moving average doesn’t spell imminent doom. BABA stock is boasting rising 50- and 200-day moving averages, so you should view even a larger pullback as an eventual buying opportunity.
Overall volume patterns in recent months have been extremely bullish, despite today’s trading session registering a distribution day. Perhaps that’s not surprising given Alibaba’s gargantuan gains. But it does increase the likelihood of buyers eventually swarming to halt this decline — just like they did with each of its predecessors.
2 Plays for BABA Stock Bulls and Bears
We may see a further retreat for BABA stock before it finds support, but the odds still favor bullish plays.
Bull Put Spreads: Bull put spreads look interesting amid the recent rise in implied volatility for Alibaba options. If you think Alibaba remains above the century mark, sell the Oct $99/$95 bull put spread for 54 cents. The max reward is limited to the initial 54 cents and will be captured if the puts expire out-of-the-money. The max risk is $3.46 and will be lost if BABA falls beneath $95.
Bear Call Spreads: Alternatively, if you think today’s drop portends further weakness consider selling the Oct $113/$117 bear call spread for 41 cents. Essentially it’s a bet that Alibaba stock remains beneath $113 for the next few weeks. The reward is limited to 41 cents and will be captured if the stock sits below $113 at expiration. The risk is limited to $3.59 and will be lost if BABA rises above $117.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
