Alibaba (NYSE:BABA) stock has shown resilience during the market bloodbath, but make no mistake; the once-robust uptrend has taken serious damage. A fresh look at the price chart is needed to determine the best play on BABA stock in the current trading environment.
Since Alibaba is one of the biggest players in China’s stock market, let’s look at how the iShares China Large-Cap ETF (NYSEARCA:FXI) has fared relative to the disastrous drop in U.S. equities. From January’s peak to current lows, FXI has dropped by 26.9%.
By comparison, the S&P 500 ETF (NYSEARCA:SPY) has a peak-to-trough drawdown of 32.8%. If you’re looking for a silver lining, China’s performance hasn’t been near as bad as America’s. If the relative strength persists, it will bode well for Alibaba.
Alibaba Stock Charts
The past month of selling has damaged both the daily and weekly trends.
On the weekly front, BABA has broken a prior pivot low as well as the 20- and 50-week moving averages. Both are reflective of a more serious correction and should give dip buyers pause.
The RSI indicator is sinking to the lower 40s, which places it into bearish territory. In case you’re curious, Alibaba stock has tracked FXI by matching its 26% decline.
The one bright note with the bigger picture is we are holding the lower trendline that has defined BABA’s trend since late 2018. This zone halted every one of last year’s pullbacks so its a good omen that buyers are willing to defend their turf once more. If you’re in the mood for bottom fishing based on a weekly retracement, I could see triggering a bullish trade over this week’s high ($189.39) with a stop under the low ($170).
Unfortunately, my excitement for the trade idea sours when turning the daily chart. The sharp descent crashed through the 20-day, 50-day, and 20-day moving averages. Though we’re trying to climb back above the 200-day this morning, it’s been a struggle so far. Breaking horizontal support at $200 was particularly detrimental to BABA’s stock trend, and now sits atop the stock as a potential major resistance zone along with every moving averages.
Not surprisingly, distribution days, or high volume bearish sessions, have multiplied showing strong selling pressure by the big boys.
The Bull and Bear Case
Let’s sum up the bearish and bullish arguments.
Bulls will argue Chinese stocks are outperforming their U.S. counterparts and Alibaba has held up relatively well during the meltdown. It’s holding a long-term trendline and is flashing a lower-risk entry for long-term investors.
Bears will contend that the weekly retracement is too deep and the RSI too low to justify purchasing. The daily time frame has a mountain of potential overhead resistance that threatens to stymie any upside reversal.
Sometimes the best trade is no trade. Since I find both arguments compelling, my suggestion is to play elsewhere. There are stronger stocks to buy and weaker ones to short.
As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. For a free trial to the best trading community on the planet and Tyler’s current home, click here!
