Shares of Alibaba (NYSE:BABA) have certainly not participated in the recent rally. After closing near the $200 level on July 25, reaching $197.98, BABA stock has fallen nearly 10% to $178.62 while the overall markets have headed higher in that time frame.
While certainly some of this weakness is due to tariff turmoil and currency wars, the selling is now getting overdone. Look for Alibaba to find support and begin to bounce near current levels.
Click to Enlarge BABA stock is getting decidedly oversold from a technical perspective. The 9-day RSI is fast approaching the 30 area which has signified significant short term lows in the past. Alibaba also broke the widely followed 200-day moving average for only the second time in the past year. The previous instance when this occurred proved to be a major turning point for the stock. There is solid long-term support at the $170 level for BABA stock as well.
Click to Enlarge As a huge internet commerce player, Alibaba is sometimes called the Amazon (NASDAQ:AMZN
) of China. As such, normally there is a fairly high correlation between the two stocks. A look at the comparative performance chart of BABA to AMZN shows that correlation breaking down in a big way since late June, with Alibaba falling sharply while Amazon is trading near all time highs. I look for this correlation to revert to the mean and BABA stock to be a relative outperformer over the coming months.
In my previous post on BABA, I recommended a July put credit spread trade to position to profit from an oversold Alibaba. This proved to be a profitable trade, with BABA stock closing well above the short put strike. Now that Alibaba has fallen even further and returned to a similar oversold condition, a put credit spread trade once again makes sense.
BABA Stock Trade Idea
Buy BABA Sep $160 puts and sell BABA Sep $165 puts for a $1 net credit.
Maximum gain on the trade is $100 per spread with maximum risk of $400 per spread. Return on risk is 25%. The short $165 strike price is well below the major support level at $170 and provides a 7.62% downside cushion to the $178.62 closing price of BABA stock. Earnings are due Aug. 23 so the September expiration is well past that date.
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