Alibaba’s (NYSE:BABA) latest quarterly earnings are out, and investors’ response is one of apathy. Though the losses increased throughout the day, the initial 2% drop might as well be an unenthusiastic shrug. Historically, these reports generated fireworks and massive volatility. But not this time. Ironically, we’ve seen just as much movement in BABA stock during regular trading sessions.
If anything, this latest release is extending the recent reprieve for traders tiring of the Chinese giant’s gyrations.
Despite the lackluster price reaction, Alibaba’s numbers revealed multiple highlights. For starters, the company’s cloud computing division eked out a profit for the first time. The push into positive territory came on the back of a 50% year-over-year increase in cloud computing revenue to 16.11 billion yuan.
Many are looking to the cloud as a key driver of the company’s growth moving forward.
Alibaba’s overall revenue grew to 221.08 billion yuan, easily surpassing the Street’s forecast of 214.4 billion yuan. That translated into a bottom-line beat, with earnings per share coming in at 22.03 yuan versus expectations of 20.87.
BABA Stock Chart is a Mess
While the fundamentals are holding up, Alibaba’s price chart leaves much to be desired. The past quarter has seen an explosion in volatility create quite a tricky trading environment. Let’s start with the weekly time frame.
The fourth-quarter slide really threw a wrench into the long-term uptrend, quickly slicing below the 20-week and 50-week moving averages. We’ve seen a robust rebound off the lows, but it’s been insufficient in reversing the weekly downtrend.
If anything, Tuesday’s post-earnings drop increases the likelihood that a lower pivot high is forming here. The best-case scenario is to see prices hold firm in this area to digest the recent gains. Ultimately, we need a break back above resistance near $270 to return the weekly trend to bullish territory.
You can better see the choppy nature of Alibaba’s past quarter on the daily time frame. Last month buyers succeeded in pushing prices north of the 50-day moving average for the first time since the selling began in earnest in November. We’ve now consolidated above the 50-day for two weeks. Remaining here is a must if bulls are going to maintain their foothold. Unfortunately, Tuesday’s decline has brought prices perilously close to breaking below it.
In the short run, I think the lines have been drawn for new directional trades quite nicely. Buyers need BABA stock to push above the top side of the recent range at $267. Until then, long trades are best left undeployed. Given the generally bearish response to the earnings report, you have to give sellers the upper hand going into Wednesday’s trading session. Still, I would wait until the $252 support zone cracks.
Two Trade Picks
Given the right trigger, I can see a path forward for bulls and bears here. It’s just a matter of waiting until the price shows its hand. A break of $267 opens the door to purchasing call spreads. Conversely, falling below $252 would warrant entering put spreads. Here are the trade structures I prefer.
Bull Call: Buy the April $270/$280 call vertical.
At the time of trigger, the cost should be approximately $4. That places your risk at $4 and the reward at $6.
Bear Put: Buy the March $250/$240 put vertical
At the time of trigger, the cost should also be near $4. The spread carries the same risk and reward as the bull call.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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