Shares of Alibaba Group Holding Ltd (NYSE:BABA) officially entered a bear market after dropping from an intra-day high of $201 on March 15th to an intra-day low of $180.40 on Friday. This marked the second pullback of this magnitude in the past year. Now that the selling in Alibaba stock has been staunched once again, I look for BABA to bounce in the coming weeks.
In my previous post on Alibaba stock from March 19, I had a decidedly bearish viewpoint with BABA looking toppy at the $200 level. I expected a pullback towards the $192 area, which proved to be the case (shares closed yesterday at $190.50). Now that Alibaba has fallen sharply, my bearish tone has tempered as well, because price does matter.
A simple MACD reversal methodology has been very effective in identifying short-term lows in Alibaba stock over the past six months. The actual method is straightforward and simple. Once BABA stock breaches a -0.50 reading on MACD, the first signal is generated. The final buy signal is generated when the MACD closes at a higher level than the previous day.
Yesterday’s price action generated a new buy signal as MACD closed higher compared to Friday after previously breaching the -0.50 level. The prior 5x buy signal was generated using this methodology and proved to be s significant bottom in Alibaba stock. There is also major downside support lurking at the $170 area.
Just as importantly, Alibaba stock put in a series of higher lows as each new attempt to take the stock to lower levels was met with renewed buying.
BABA options are still comparatively expensive with implied volatility (IV) readings in the 66th percentile. This favors option selling strategies when structuring trades. So to position for a short-term low to form in Alibaba stock, a put credit spread makes intuitive sense.
Trade Idea for BABA Stock
Buy BABA May $165 puts and sell BABA May $170 puts for a 90 cents net credit
Maximum gain on the trade is $90-per-spread with maximum risk of $410-per-spread. Return on risk is 21.95%. The short $170 put is struck right at the major support level of $170 and it provides a 10.50% downside cushion to the $190.50 closing price of BABA.
Tim may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his option-based strategies can go to https://marketfy.com/item/options-and-volatility/.
