Shares of Alibaba (NYSE:BABA) are struggling to head higher after a monster move off the recent lows. Alibaba stock had been off to a torrid 2019, heading higher by over 30% so far this year. The past few days, however, have seen that red-hot rally begin to fizzle. Time to short an overvalued and overbought BABA now that the momentum has broken.
The fundamentals are looking a little rich at current levels.
BABA’s price-to-earnings ratio is now over 35 and at the highest readings over the past six months. The previous time BABA carried such a lofty multiple marked a significant high in Alibaba stock. Other metrics, such as price-to-sales and price-to-free cash flow paint a similar picture.
The technical backdrop is decidedly bearish as well. The 14-day RSI had reached the most overbought levels of the past year before weakening. The previous time it approached such extremes coincided with a major top in BABA stock. The MACD remains in negative territory, another bearish sign. There is major overhead resistance at the $185 area as well.
Most importantly, Alibaba stock tried and failed twice over the past two days to break out past $185. This type of rejection at major resistance is many times a sign that the buyers may finally be getting exhausted. A break below the 20-day moving average at the $180 area could be the catalyst for a further leg lower.
In my previous article on Alibaba from last October, I had a more bullish opinion on BABA when it was trading near the $140 area. Valuations were much cheaper and shares were oversold. Now that Alibaba stock has rallied nearly 30% higher toward $185, my viewpoint has become decidedly more bearish because price does matter.
Longer-term investors should look to short Alibaba on any further rallies. Shorter-term option traders may want to consider selling the April $187.50 calls and buying the April $190 calls for a 50 cents net credit. This bearish call credit spread has a maximum gain of $50 per spread with a maximum risk of $200 per spread. Return on risk is 25%. The short $187.50 put provides a 3.3% upside cushion to the $181.74 closing price of Alibaba stock.
Earnings are due May 1, so the option spread will expire before then and avoid any earnings-related risk.
Tim Biggam 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
