This year’s destruction in Chinese stocks stands in stark contrast to the profit-filled euphoria carrying American stocks to the moon. For much of 2021, the iShares China Large-Cap ETF (NYSE:FXI) has behaved like an inverse exchange-traded fund. Heavy regulation and anti-capitalist attitudes have extracted a heavy toll on companies like Alibaba (NYSE:BABA), and many investors have been rapidly reducing exposure to BABA stock.
But a potential bottoming formation has finally developed on the daily time frame. It’s the first such reversal attempt since June, and merits investigation.
At the same time, the entire emerging markets space has been making a comeback. Skeptics will cry dead-cat bounce, and they may be right. But maybe not! If there’s one thing trading demands, it’s to keep an open mind – to anticipate all potential scenarios.
Sure, this rebound could get rejected like so many of its predecessors. But it’s at least worth entertaining the possibility that buyers have finally gained the upper hand. Let’s take a closer look.
BABA Stock Charts
To avoid reading too much into the short-term, it pays to first look at the weekly chart.
If you want to grasp a sense of just how hated Alibaba and friends have become, consider this. BABA stock fell below its March 2020 pandemic low last month.
Despite all the ground gained by the global economy since the novel coronavirus first entered the equation, traders view Alibaba’s prospects as even worse now. Pessimistic much? From peak to trough, the e-commerce giant fell 52%.
It’s now submerged well below all weekly moving averages. Worse, momentum increased during the downswing that just ended, so the big picture remains soundly bearish.
That said, bulls have two arguments. First, BABA stock became extremely oversold and was begging for a bounce. Second, the $150 zone has provided support in the past making it a logical gathering ground for buyers to finally mount a comeback.
The bull case does strengthen when using the daily chart.
If you want to improve your chart reading, focus on the relationship between pivots. When they’re getting lower, it’s bearish. When they’re getting higher, it’s bullish. Ever since June, the pivot relationship has largely been lower. Increasing supply drove prices into the ground and every bounce attempt was met with swift rejection.
But last month that started to shift. The most recent pivot formed at a higher level (if slightly) than the previous one. What’s more, the past week’s rally succeeded in pushing prices enough to create a higher pivot high.
So far we’re failing at the falling 20-day moving average, so I’m considering this a meager foothold established by bulls only. They need to capitalize and provide further evidence that the tide is turning before demanding spectators join their team.
Pick Your Team
In sum, we have a bearish weekly chart and the inklings of a bullish move starting on the daily. In a situation like this, you must decide which side has the more compelling case. I’ll provide my favorite trade idea for both teams.
This isn’t the time to be a hero and swing high delta call options. Embrace the higher probability of bull puts and bet that buyers can continue their reversal attempt.
Bull Trade: Enter the October $150/$145 bull put spread for 50 cents.
For those thinking this bounce attempt fails as miserably as the previous one, long put spreads offer a handsome payout.
Bear Trade: Buy the October $170/$155 bear put spread for $3.90.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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