Large-cap tech has yet to fully recover from its recent downturn. The weakness is particularly potent in twin Chinese companies Alibaba Group Holding Ltd (NASDAQ:BABA) and Baidu Inc (ADR) (NASDAQ:BIDU). Support levels have given way in both and they now found themselves submerged beneath the 50-day moving average. Let’s zero in on BABA to highlight its bearish turnabout.
It’s worth noting, that despite the short-term weakness in Alibaba stock, its long-term trend remains very much in the bulls hands (hooves?).
So while the technical deterioration is worthy of caution in the short run, it has yet to upend the bigger trend. Furthermore, sellers have failed each and every time they’ve tried to wrest control of this market, so even though BABA is showing bearish signs, it could be a short-term phenomenon.
The late-November downturn striking tech stocks caused BABA to break support in the form of a prior pivot low, as well as its 50-day moving average. The stumble was good for a 14% haircut which is the largest drop we’ve seen for the stock all year long.
Its recovery attempt was valiant but thus far insufficient in stemming the bearish tide.
Though we saw a modest five-day bounce, its volume was lackluster and it failed to reclaim the high ground. The 50-day moving average is now acting as resistance and until we climb above it, sellers will have control. To be clear, I suggest being bearish unless BABA can break back above $181.
Yesterday’s sell-off confirmed the formation of a new, lower pivot high and kicked off the stock’s next downswing. Continuation should carry Alibaba back to its lows at $165 making that a logical target for this move.
The Bet-BABA-Remains-Weak Trade
If you’re willing to bet the stock remains below $190 for the next month, then sell the Jan $190/$195 bear call spread for 70 cents credit. The max reward is limited to the initial premium received and the max risk is $4.30. To minimize the damage if BABA finds its footing, I suggest exiting on a break of either $181 or $190.
As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. Want more education on how to trade? Check out his trading blog, Tales of a Technician.
