Alibaba Stock Is Stuck in Neutral

Alibaba (NYSE:BABA) stock has seen better days. So have most of the publicly traded Chinese stocks, for that matter. Relative weakness has plagued the entire country, and even the most ardent BABA stock fanboys are finding it difficult to spin a bullish tale.

alibaba stock international stocks
Source: Colin Hui / Shutterstock.com

While I’d like to throw a bone to buyers, I haven’t any to spare.

But if history is any indication, we won’t have to wait long until the stalemate is finally broken.

Something always comes to disrupt the equilibrium and spark a new trend. Maybe it will be earnings. Maybe it will be some unscheduled and otherwise unpredictable news event that upsets the balance.

In any case, today’s analysis will lay out the price levels that need to be broken before directional trades are worth placing.

Until then, neutral cash flow plays are the way to go for traders that have to play.

Chinese Stocks Are Lagging

China Large-Cap ETF (FXI) with relative weakness
Source: The thinkorswim® platform from TD Ameritrade

The persistent underperformance of Chinese equities isn’t hidden. All it takes is a quick look at the iShares China Large-Cap ETF (NYSEARCA:FXI) versus the S&P 500 to spot it. While FXI is nearly 14% off its highs, the S&P 500 is at its peak. But China isn’t just falling behind its American counterpart. It’s lagging the entire emerging markets space – which is arguably a better apples-to-apples comparison.

Take note of the relative strength study in the lower panel of the FXI chart below. Short of a single burst higher in mid-January, the indicator has been trending lower for the past six months. The indicator is a ratio of FXI over EEM. Basically, it trends higher when China is leading and lower when China is lagging.

While it’s true that stocks move sympathetically with their sector, they also move sympathetically with their country. It’s hard to have conviction with a bullish-leaning BABA stock play when FXI is so underwhelming. Buyers could make a much stronger case if the fund pushed above its 50-day moving average (currently at $48.25) to at least start trending higher.

If such a surge came alongside a reversal to relative strength versus EEM, then even better.

BABA Stock Chart

Alibaba stock (BABA) chart with trading range
Source: The thinkorswim® platform from TD Ameritrade

At $236, Alibaba shares sit 26% off their high and are submerged beneath both the 200-day and 50-day moving average. Were the descent to come when the rest of the broader market was suffering through a cyclical downturn, then perhaps the weakness would be both understandable and forgivable.

But it’s not.

It’s rare to find a stock below the 200-day moving average, which says something about just how idiosyncratic the issues are that weigh on BABA. Support at $220 is throwing beleaguered shareholders a lifeline. Multiple downswings have halted in its shadow. With that, the downtrend’s momentum has slowed and shifted to more of a sideways range.

A few brave bottom fishers could be casting a line here, but their entry must be characterized as anticipatory because we’ve yet to see the trend fully turn. For more confirmation, I suggest waiting on a push above resistance at $245 before deploying bullish trades.

I suggest waiting for a break below the $220 support zone to signal a new down-leg has begun for those looking to go bearish.

If I Had to Trade Alibaba Now

If you don’t want to wait for a break in either direction, or you want to profit while the range persists, then iron condors are the way to go. The strategy consists of selling an out-of-the-money bull put and bear call spread hoping that the stock remains between both positions. If it does, the options will expire worthless, and you’ll pocket the premium received at trade entry.

The Trade: Sell the May $220/$215 bull put and May $260/$265 bear call for a net credit around $1.20.

The max gain is $1.20, and the max loss is $3.80. Consider exiting to minimize the damage if BABA stock falls below $220 or above $260.

On the date of publication, Tyler Craig held LONG positions in EEM.

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