Alibaba (NYSE:BABA) is benefiting from two powerful bullish trends. Today we’re taking a close look at both, and identifying how you can join the party using Alibaba stock options.
When you look at sector performance off the March low, it’s impossible not to notice the leadership of the tech sector. The muscle-flexing has been particularly impressive among large caps.
In the post-novel coronavirus world, size has mattered. Behemoth companies boasting better balance sheets and borrowing power have fared much better than debt-laden small-caps. For proof, check out this year-to-date chart comparison of the Nasdaq-100 and the Russell 2000. The former is the premier benchmark for large-cap tech stocks, and the latter is the go-to proxy for small-caps.
The performance gap between the Powershares QQQ ETF (NYSEARCA:QQQ) and the iShares Russell 2000 (NYSEARCA:IWM) is massive. While QQQ is up over 20%, IWM is down more than 10%.
It’s worth noting that the Nasdaq-100 doesn’t count Alibaba stock among its top holdings, even though it is one of the largest tech companies in the world. This is because Alibaba is listed on the New York Stock Exchange instead of the Nasdaq. The comparison still holds, however, because the stock tends to move with the tech sector. Its correlation more than its index inclusion, then, makes the point valid.
Continued outperformance from the technology sector will bode well for Alibaba.
China Awakens
The second, more recent theme, working to BABA’s benefit is the surge in Chinese stocks. They were already participating in the recovery off the March low, but encouragement from the government added more fuel to the fire. Earlier this month, an editorial in China’s state-owned China Securities Journal told citizens to embrace the “wealth effect of the capital markets” and a “healthy bull market.”
Investors responded in a big way, driving the iShares China Large-Cap ETF (NYSEARCA:FXI) up some 13% in two trading sessions. The buying binge propelled FXI to a new 52-week high and provided a significant boost to Alibaba stock.
How to Trade Alibaba Stock Now
Sometimes price charts are messy. Mixed messages flash warning signs to would-be traders that the odds are low and better opportunities lie elsewhere. Fortunately, this doesn’t apply to Alibaba. Its chart is super clean and super bullish. The trend is pointing higher across all time frames, and every moving average is rising in support of prices.
The most important development, and that which makes me most excited about its current prospects, is the early-July breakout over $230. For months it held firm, rejecting multiple rally attempts. Its failure marks a big change in character for Alibaba stock, sparking what could be a new, more powerful uptrend. If nothing else, it reflects the existing trend is increasing in momentum.
Volume exploded alongside the breakout, signaling institutions, and other deep pockets were entering the fray. Last week’s pullback created a perfect chance to buy the dip for those who missed the initial burst. And based on this morning’s 3% pop, bulls aren’t waiting around. If you’re not already in, you have two choices.
First, you could wait and see if this morning’s up gap fills, and you get a lower entry point. The risk, of course, is that the stock keeps running, and you miss out.
Second, you could jump in right now. If the gap fills, you might have to sit through some unrealized losses before the overall uptrend pulls the stock higher. But, you’ll at least have your foot in the door and be able to participate in further gains.
Implied volatility is low, suggesting long premium plays are attractive.
The Trade: Buy the Sep $260/$270 bull call spread for around $3.70.
The max loss is $3.70, and the max gain is $6.30.
Tyler Craig is a member of the Chartered Market Technician’s Association and holds the CMT designation. His entire adult life has been dedicated to helping individuals learn how to trade as an elite instructor and personal mentor. To join his team and the best trading community on the planet, click here. At the time of this writing, Tyler held bullish positions in BABA stock options.
