The rebound in Alibaba (NYSE:BABA) has been choppy, but buyers are prevailing. Just yesterday, the Chinese internet giant reached a new post-crash high and came within inches of a record. Though Alibaba stock succumbed to profit-taking on Wednesday, ultimately falling 1.1%, the weakness paled in comparison to the bear raids seen elsewhere.
Relative strength and record highs are about as bullish a combo as you’ll find in the field of technical analysis, and it’s why the chart demands spectators either buy the dip or chase the imminent breakout.
The China Backdrop
If the backdrop for U.S. equities is the S&P 500, then for Alibaba, it’s the iShares China ETF (NYSEARCA:FXI). When FXI is hot, it acts as a tailwind for the likes of BABA. Just as it would be hard for an American stock to rip higher if the S&P 500 was getting torched, it’s challenging for Alibaba shares to boom if investors are souring on China.
While not as bullish as the tech-heavy Nasdaq Index, FXI is tracking the S&P 500. It failed to reach a new high on its most recent upswing, but Wednesday’s selling was contained. We even stayed above the 20-day moving average, preventing what could have been a short-term bearish signal.
We have seen a few distribution days crop up over the past two weeks, but so far, the lack of downside follow-through is keeping sellers in check. Here’s the bottom line: FXI’s behavior points toward higher prices and provides the confidence needed for leaning bullish in Alibaba stock.
Alibaba Stock Charts
The weekly time frame reveals a stock that’s come full circle after plumbing the depths in March. The ascent has had a few setbacks, but all of the pullbacks proved shallow and short-lived, just like buyers like them.
With this week’s rally, BABA is testing its January high and provides an easy price level to trade from.
Though the RSI hasn’t returned to overbought territory, it has reclaimed 50 and sits squarely in the bull zone. Some backing and filling may be needed before we break the old peak, but there’s no denying the weekly trend suggests it will happen.
For more granularity, let’s zoom in to the daily chart.
Moving averages have been well respected on the way up. The 200-, 50- and 20-day moving averages have all buyers swarming at their levels to defend the uptrend. Interestingly, the first bounce occurred at the 200-day (May 4), the second and third ones pivoted off of the 50-day (May 14 and 29), and the fourth and final one transpired at the 20-day (June 15).
The fact that buyers are swarming quicker each time is a bullish omen. Demand is rising, and bulls aren’t waiting as long before pouncing.
Volume patterns along the way echo the constructive price signs. A single distribution day cropped up last Friday, but this week’s rebound has already negated it. Outside of that, the other high-volume days came during rallies suggesting institutions are net buyers of Alibaba stock.
Two Breakout Trades
Any time a breakout approaches, traders have two choices – buy in anticipation of the breach or enter afterward. The former offers better prices but less confirmation. The latter offers more confirmation but a worse price.
What’s more, you have multiple options strategies you can use, depending on how aggressive you want to be. Here are two trades to consider.
Anticipatory Entry, Higher Probability: You could buy the current dip, anticipating that the stock will eventually break out above $231. For a higher probability of profit, sell the July $210/$205 bull put spread for $1. As long as BABA stays above $210, you’ll come out a winner.
Confirmation Entry, Higher Reward: Wait for a push above $231 to confirm the breakout has arrived. Then buy the Aug $230/$240 bull call spread. The price should be around $5 at that point, and it will offer the chance to double your money on a push past $240.
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