Credit has to be given where it’s due — at least the Alibaba Group (NYSE:BABA) bulls are trying. Though down in step with most other stocks since late July, Alibaba stock turned the ship around in early August before a major technical floor was broken. For the second time in less than three months, that recovery effort is unfurling on above-average volume.
It remains to be seen if it will take hold. A solid second quarter report from rival JD.com (NASDAQ:JD) certainly helped fan the bullish flames of the current rebound effort. But, it wasn’t enough to push BABA stock above a convergence of technical resistance before a newly-inverted yield curve stoked recession fears … again.
Thursday’s post-close earnings report from Alibaba Group may well force traders to commit to a decision, for better or worse, on Alibaba stock.
BABA Stock Getting Squeezed
It’s a misnomer that all of China’s top stocks are in a nosedive. Certainly Weibo (NASDAQ:WB), Baidu (NASDAQ:BIDU) and Iqiyi (NASDAQ:IQ) have been fighting losing battles. Baozun (NASDAQ:BZUN), Tencent (OTCMKTS:TCEHY) and Alibaba stock remain in distinct uptrends though, even with sizeable setbacks seen in the middle of 2018.
That could all change dramatically after Thursday’s closing bell rings, however. That’s when Alibaba is slated to reveal last quarter’s results into an environment where there’s little room left to roam.
The chart tells the tale. The rising support line in place since early 2016 is still intact, prompting last week’s rebound effort. But, a relatively young falling resistance line is also in place. That’s what broke the rally effort in July, and ultimately in May as well.
Click to Enlarge
Those two lines are clearly on an intercept course, now less than thirty points apart. That’s not a lot of room for BABA stock to do what it usually does.
It’s highly likely that whatever Alibaba reports on Thursday will ultimately snap the psychological underpinnings of either the support or resistance that has taken shape over the past few months.
Alibaba Group Facing a Headwind
The company’s first-quarter fiscal results are going to be unveiled in a less than hospitable environment.
Although the White House backed off on plans to introduce new tariffs on Chinese imports into the United States this week, older tariffs remain in place. While the U.S. economy is growing at a measurable pace, China’s is starting to show serious cracks. The country’s industrial output grew at a 17-year low in July. Though it hinted at a recovery in June, retail spending growth fell to 7.6% last month … the second-lowest growth pace in years. The nation’s unemployment rate grew from 5.1% in June to 5.3% in July.
It remains to be seen to what extent that turbulence will affect Alibaba’s results. The quarter in question ended in June, so the first two months of the three-month stretch were reasonably healthy.
Conversely, investors are increasingly pricing stocks based on where it seems they are going rather than where they have been. If China’s e-commerce giant paints anything less than a rosy forward-picture, nervous investors may assume the worst and respond bearishly to bullish news.
Looking Ahead for Alibaba Stock
As of the latest look, analysts are calling for earnings of $1.46 per share of BABA stock on revenue of $15.82 billion. That’s considerably more than the year-ago figures of $1.16 and $11.66 billion. The bar is set uncomfortably high.
On the other hand, Alibaba only failed to top one quarterly estimate for the past three years. Again, a beat may still not be good enough against the present backdrop consisting largely of worry.
Whatever’s in store, just know that the chart is just as likely to lead the rhetoric as much as it’s apt to be shaped by it. But, that’s potentially problematic in itself.
If a modest breakdown drags Alibaba stock below the aforementioned floor, that selloff will be heavily highlighted by the financial media, which will exacerbate the selling by virtue of inciting more fear. The market-wide tide will also play a role in the stock’s direction from here, and clearly investors are increasingly nervous.
Perhaps there’s a case to be made for being on the sidelines by the time Thursday’s closing bell rings, even if it means leaving money on the table. There’s likely to be plenty of trade-worthy action outside of the converging wedge shape.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.
