Buyers are gobbling up Tuesday morning’s down gap like it’s Thanksgiving. And that has me on the hunt for high-quality uptrends that got caught up in the selling. After scoping out numerous candidates, it’s Alibaba Group Holding Ltd (NYSE:BABA) that has settled in my crosshairs. BABA stock has been one of the strongest on Wall Street, and it just formed one of the cleanest pull back setups I’ve seen in awhile.
Let’s dig in.
To say this has been a banner year for Alibaba would be an understatement. The Chinese e-commerce juggernaut has seen its share price almost double (+92%). And the price action has been picture-perfect. It belongs in a textbook.
The 20-day moving average has provided support the entire way up, and the 50-day and 200-day are following along in true bullish fashion. Every retracement has been shallow and short-lived, just like shareholders like them. Heck, BABA stock hasn’t even tested the 50-day since the uptrend began.
Of course, the warming of Wall Street toward emerging markets certainly hasn’t hurt either. This year, these foreign stocks are beating the pants off of U.S. equities.
Spectators worried that the past four days of selling are driven by institutions jumping ship need only look at the volume patterns. The lack of any major distribution days suggests we’re seeing just garden-variety profit-taking at this point. And with such bullish undertones driving this uptrend, I see little reason why this dip won’t get bought up like all its predecessors.
Two potential support levels loom close:
- There’s the unfilled gap created by the price jump on Aug 17.
- There’s the 20-day moving average, which has been a gathering ground for dip buyers all year long.
Trading BABA Stock
Even though Alibaba’s earnings report is long since past, the implied volatility remains elevated. The IV rank is 54%, suggesting bull put spreads are paying handsome premiums. Sell the Oct $145/$140 bull put for 50 cents or better. Consider it a bet that BABA remains above $145 for the next 52 days.
You will capture the maximum profit of 50 cents if the puts expire out-of-the-money. The max loss is $4.50, but you can minimize the damage by exiting if Alibaba falls to the short put strike of $145.
As of this writing, Tyler Craig held bullish option positions in BABA. Want to learn how to master the art of option selling for high-probability cash flow? Check out Tyler’s recently released video series through Tackle Trading on how to systematically sell iron condors for monthly income.