Market euphoria has been almost everywhere over the past few months. And in a market made up of stocks, Alibaba (NYSE:BABA) hasn’t proven immune. But what will happen moving forward? Let’s examine what’s happening off and on the Alibaba stock chart, as well as a smarter way to profit.
It’s no secret that Wall Street has enjoyed a record-breaking rally since hitting a bottom in late March. The bullish price action has been led by gains upward of 63% and multiple all-time highs in the tech-heavy Nasdaq Composite.
Not entirely surprising, a reinstated trillion-dollar club of Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Amazon (NASDAQ:AMZN) has been key in the broader market’s triumphant performance. But these American tech leaders aren’t alone by any means.
Chinese Stocks Are Upping the Competition
Chinese stocks have been on a tear as well. For one, U.S.-listed iShares China Large-Cap ETF Trust (NYSEARCA:FXI) hit new highs for 2020. That compares favorably to the S&P 500 which is still underwater for the year. That’s not all, either.
The Invesco China Technology ETF (NYSEARCA:CQQQ) has performed even more strongly. It’s gained as much as 35% and consistently notched record highs since mid-June.
But we can’t forget about Alibaba stock.
Why is Alibaba outperforming the market in 2020? There’s a saying on Wall Street that you shouldn’t “fight the Fed” and it certainly applies here. Inadvertently, pressure from the White House to push monetary policy into uncharted territory to continue supporting the stock market has fueled a risk-asset rally across borders.
But Alibaba’s outperformance also has China’s state media and that government’s own unique brand of brute behavior to cajole markets higher. Just last week, risk assets surged after a front-page editorial in the state-owned China Securities Journal stressed a “healthy bull market” is important. And for its part, the news sent Alibaba stock up more than 7%. That helped BABA clear January’s all-time high.
Alibaba Stock Monthly Chart
It’s not always the case that what goes up, must come down. When it comes to Alibaba stock though, decent technical evidence was hinting of the current, abrupt bout of profit-taking. But is it time for investors to buy?
The provided monthly chart illustrates a stock that’s made a lot of healthy-looking progress, as well as the occasional misstep since going public nearly six years ago. The net result of Alibaba’s pattern bases and corrective moves has established a very solid up-channel. Overall, it’s bullish.
But at last week’s high, Alibaba stock was ripe for profit-taking. Shares challenged a lifetime overhead trend line. The stock also pierced through the upper Bollinger Band. As well, an overbought stochastics warned resistance might be harder to overcome. And BABA has respectively complied and pulled back by as much as 10%. It’s a decent counter-trend reaction, but is it buyable?
How to Trade Alibaba Stock
For momentum investors, an Alibaba purchase makes sense. Shares remain overbought and the pullback lends itself to buying on temporary weakness in anticipation of more technically pricey conditions to come.
A more value-oriented technical buyer would likely wish to see a deeper test play out. My eyes are drawn to the area from $216-$231. This zone holds a former pattern high, steeper trend-line support within the channel and three layers of Fibonacci levels from 2018 and 2020 lows.
So, which is the better approach for buying Alibaba? Momentum today or value tomorrow? The answer could hold the key to which marks the launching pad for an eventual new member of the trillion-dollar club. The good news is with Alibaba’s options market, investors don’t necessarily need to guess.
One solution to the dilemma in Alibaba is to buy either an out-of-the-money call or bull call vertical and simultaneously sell a below-the-market put spread.
Bottom line, this strategy positions traders to profit from momentum and vastly reduces the cost of the investor’s bullish exposure. But if conditions continue to weaken, the combination offers the opportunity to effectively purchase Alibaba at a discount to the current market price with defined risk.
That sounds much better than calling the next bottom, don’t you think?
Investment accounts under Christopher Tyler’s management do not currently own positions in securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
