Why and How You Should Shop the Drop in Alibaba Stock

Alibaba (NYSE:BABA) has been under pressure of late. And there’s reasons behind the mayhem to be certain. Still, in the current market — and looking both backwards and forward — BABA stock is now offering investors an attractive opportunity to shop the drop. That said, let’s take a look at what’s happening off and on the price chart, then offer a couple risk-adjusted determinations aligned with those findings.

Alibaba (BABA) logo on the side of a glass-walled building.
Source: testing / Shutterstock.com

Even the best sometimes do it and often enough, logic appears to be left at the door; Sometimes. I’m referring to stocks and those inevitable corrective drawdowns. And it’s happened over the last month in shares of BABA stock. At its recent low, Alibaba stock was off by 19% from their record high set on Oct. 27.

However, Alibaba is alone in its misery.

Tech giants Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) and Alibaba’s U.S. counterpart Amazon (NASDAQ:AMZN) have been correcting for three months since hitting all-time-highs in early September. Netflix (NASDAQ:NFLX) has also been challenging some investors bullish wherewithal since mid-July. Of course, each incident has a story or narrative to support the relative weakness.

And here too, BABA stock is no different.

Exactly one month ago, Alibaba shares went into a full-blown corrective phase overnight on news the Shanghai Stock Exchange was suspending the IPO of Ant Group. It was and is a big deal in every sense. The fintech was founded by Alibaba co-founder and former executive chairman Jack Ma and was priced to become the world’s largest IPO at a valuation in excess of $300 billion. In the wake of the announcement, shares plunged over 8% to establish a corrective move of nearly 12%.

However, the motive to sell didn’t stop there either. BABA stock investors were further incentivized a week later as record-breaking sales of $56 billion during China’s annual Singles Day celebration were overshadowed by proposed anti-trust regulations being considered by authorities.

Specifically, and for the first time in China, draft rules were released which defined anti-competitive behavior covering pricing, payment methods and use of data to target shoppers. Sound familiar? Think Amazon or Alphabet (NASDAQ:GOOGL) and other trillion-dollar club tech stocks caught in the crosshairs of U.S. regulators. And far from surprising given those stocks forlorn price behavior anytime a new Department of Justice report makes the rounds, Alibaba tumbled 13% over two sessions to test a less-challenging period within the stock’s uptrend.

BABA Stock Weekly Price Chart

Alibaba (BABA) corrective move challenging pattern support
Click to Enlarge
Source: Charts by TradingView

Uptrend? Yes. Despite a larger selloff that’s even triggered a bear market defined by decline’s in excess of 20%, the pressure has put BABA stock into a Fibonacci-backed testing position of uptrend support formed off Alibaba’s novel coronavirus bottom from March. It’s promising.

Additionally, the illustrated weekly chart also reveals a small higher-low, double-bottom pattern is developing as an oversold stochastics indicator nears a bullish crossover. Even nicer, right? Yes, again. There’s more too, though.

Historically speaking, corrections in individual stocks which occur in healthy market environments can result in bearish phases of up to 30%. As much, Alibaba’s 21% price decline, along with what we’re seeing on the price chart, is more likely an opportunity to buy a leading stock at discount than a name to shun. Don’t believe me? Apple’s own correction stands at 25%. As well, BABA stock’s “bear market” is just a hair larger than AMZN stock’s 19% stock drop.

Overall, the underlying narratives pitched to justify weaker phases in stocks are often unique stories. But those alarm bells investors hear rarely amount to anything in the long run. And when it comes to a market leader such as Alibaba or its large cap tech peers, periods like today’s generally offer much stronger opportunities to shop the drop than running in the other direction.

That said, given all the evidence and with earnings still a couple months out, a slightly riskier modified collar or modestly out-of-the-money bull call spread using January contracts are two hedged strategies which have our attention and should demand yours as well.

On the date of publication, Chris Tyler does not hold, directly or indirectly, positions in any securities mentioned in this article.

Chris Tyler is a former floor-based, derivatives market maker on the American and Pacific exchanges. The information offered is based on his professional experience but strictly intended for educational purposes only. Any use of this information is 100%  the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.

Article printed from InvestorPlace Media, https://investorplace.com/2020/12/why-and-how-you-should-shop-the-drop-in-alibaba-stock/.

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