Traders returned from the holidays starving for equities. Their gorging was on full display yesterday as risk assets rallied across the board. Tech stocks led the charge with Chinese players like Alibaba Group Holding Ltd (NYSE:BABA) really feeling the love. Indeed, BABA scored an epic 6.5% pole vault reclaiming all the ground that was lost last month in one fell swoop.
The groundswell of participation was evident in the volume indicator. By day’s end, Alibaba stock racked up just shy of 30 million shares marking one of the highest volume up days of the past six months. As always, increased volume lends credibility to the breakout and hikes the likelihood that the strength is here to stay. Institutions were undoubtedly getting in on the action yesterday.
From a price perspective, the jump was significant for two reasons.
First, it marked a decisive change in character. Ever since the late-November swoon, BABA stock has been drifting. Momentum traders fled to greener pastures and the stock remained submerged beneath both the 20-day and 50-day moving averages for over a month. Yesterday confirmed these participants are returning.
Second, BABA is now well above all major moving averages and it took out a pair of horizontal resistance levels during Tuesday’s revelry.
If you’re willing to bet the stock stays aloft for the next two weeks, then sell a Jan $175/$170 bull put spread for 70 cents. You will capture the max reward of 70 cents if Alibaba stock sits above $175 at expiration.
As long as the stock doesn’t wholly retrace yesterday’s breakout move, then the trade will deliver the goods. The risk (and cost) of the spread is $4.30 and it will be forfeited if we fall below $170 by expiration. To minimize the loss, consider exiting on a break of $173.70. That’s the gap-fill area, and it should provide support.
As of this writing, Tyler Craig held bullish positions in BABA. Want more education on how to trade? Check out his trading blog, Tales of a Technician.