Alibaba (NYSE:BABA) stock has “BUY BUY BUY” written all over. The price chart is pristine and Thursday’s earnings report did nothing to deter bulls from swarming.
In fact, this morning’s 3.5% rally just jammed the Chinese giant through significant resistance. A new record has been notched, and more gains should ensue.
The Implications of All-Time Highs
Perhaps my favorite method for identifying strong stocks to buy is scanning the new 52-week highs list. Or, better yet, looking at tickers reaching a new record.
Of course, these days you can’t throw a stick without hitting something basking at all-time highs. It comes with the territory when the S&P 500 and Nasdaq are pushing into orbit.
If it wasn’t obvious on its face, here are four reasons why the all-time highs are so persuasively bullish. We’re focusing on Alibaba stock, but the same arguments apply for any equity at a record.
First, it means there isn’t a single shareholder on the planet that isn’t making money — not one. That’s a powerful motivator for staying put and letting more gains roll in.
Second, it means that everyone that ever owned BABA is looking on with regret for having sold too soon. These onlookers are liable to get pulled back in to take another bite, thus adding more fuel to the uptrend.
Third, any unfortunate souls that are short the stock just saw their losses reach new highs. In other words, their pain is now greater than ever, motivating them to bail. They do so through buying to cover shares, which will add further upward pressure to the stock.
Fourth, traders buying in right now are paying a higher price than anyone has ever paid in history. That says something about just how bullish the Street is on the company.
Alibaba Stock Charts
The weekly time frame reveals all of Alibaba’s post-IPO travels. Its rise to today’s record wasn’t immune to setbacks and bear markets, but it ultimately recovered from every correction. The recent history of rewarding breakout buyers is particularly impressive. While this week’s break could follow a different flight path, I’m willing to bet the overall trend continues.
Drilling down to the daily view reveals just how constructive the recent consolidation has been. The subtle series of higher pivot lows suggested increased aggression by buyers. All the while, Alibaba stock was building momentum to breach overhead resistance at $266 finally. It’s poetic that the quarterly earnings report arrived just in time for the ascent. There’s no denying the better-than-expected numbers were the catalyst to push prices above the recent range.
Projecting targets when a stock is in new territory is more of an art than a science. One rule of thumb I like to use is adding the range height to the breakout point. With resistance at $266 and support at $242, the range height was $24. If we add that to $266, that implies a target of $290.
Two Bull Trades
Aggressive traders looking to bank on the upside could purchase call vertical spreads out to November. That provides plenty of time for Alibaba stock to make its move.
The Trade: Buy the November $280/$290 bull call spread for $4.00
Implied volatility is high enough to consider bull put spreads if you’d prefer a higher probability trade that will profit even if BABA stagnates.
The Trade: Sell the September $250/$245 bull put spread for 90 cents.
Think of this trade as a bet that Alibaba will remain above $250 for the next month.
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