Alibaba Group Holding Ltd (NYSE:BABA) shares are giggling in the green by 32.5% so far in 2016 thanks in large part to a strong momentum breakout move in August. While the longer-term picture for BABA stock hasn’t changed (it’s still promising), I worry about the near-term rate of change for stocks. From a trading perspective, I think it’s wise not to chase Alibaba stock higher at this juncture.
In fact, investors should start to look at taking profits in BABA.
When I last opined about the state of Alibaba stock on Aug. 31, I said that following the early August up-gap, BABA looked ripe for continuation buying that could lift shares into the $105 area. Last week, Alibaba reached and even overshot that price target, so I’m updating the trade.
In many ways, BABA stock’s price action over the past two years has been similar to that of other internet stocks following their initial public offerings. Namely, Alibaba enjoyed an initial rally out of the gates for the first couple of months. After the honeymoon phase was over, it suffered a significant downtrend that shook out weak hands and non-believers. However, as analysts and investors increasingly got their heads around Alibaba’s business model, its growth prospects and potential roadblocks from a regulatory perspective, Alibaba stock started to form a technically sound base in early 2016.
The basing process was finally rewarded in August as the company reported impressive earnings. This forced growth and chart chasing investors into the stock, particularly amid a dearth of alternatives in this low-growth landscape.
BABA Stock Charts
After breaking out in the first part of August, Alibaba stock has now rallied about 25%. However, from a momentum perspective (see the MACD oscillator on the below chart), it looks increasingly overbought.
While technically overbought conditions can last for some time, the risk-reward calculation on the long side — especially for quicker traders — is less than favorable.
The 21-day simple moving average can often offer good overbought or oversold perspective.
On the daily chart, we see that BABA stock has nicely trailed higher along its yellow 21-day MA for the past few weeks. However, it’s becoming extended above this line.
In this instance, consider the sharp rally of recent weeks and the stretched upside momentum on the weekly chart.
Traders should take some chips off the table in this stock and book some nice profits for the time being.
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