Alibaba (NYSE:BABA) tagged a new 52-week low on Monday as the stock market once again focused on troubles in China. Instead of renewed concerns on the government’s crackdown against tech giants, this time, it was a potential default for the company’s second-largest property developer, the Evergrande group, that had investors heading for the exits. Today we’ll explore the latest developments in the bear market gripping BABA stock and lay out two trade ideas.
Fortunately for the layman, being on the right side of Alibaba’s trend this year hasn’t required an intimate knowledge of China’s politics. Instead, all you’ve had to do is pay attention to the price chart. Sellers have dominated since last October, and short of one or two failed reversal attempts, BABA stock has been consistently pushing lower for a year.
For this reason, I find this week’s push to fresh lows hardly surprising.
Before diving into Alibaba’s price charts, let’s first take a look at Wall Street’s go-to ETF for China analysis, the iShares China Large-Cap ETF (NYSEARCA:FXI).
The FXI Dumpster Fire
FXI offers exposure to 50 of the biggest Chinese stocks. Currently, Alibaba is the third-largest holding with an 8.6% weighting. Its diversification has been a godsend for those wanting exposure to the country, but not the idiosyncratic risk of purchasing a single company. If you think the peak-to-trough decline of 31% is bad, then you should see what’s going on in the hardest-hit names. Some have fallen more than 50%.
FXI has had multiple bottoming attempts along the way, but none was able to right the ship. Thankfully for global investors, the country’s terrible performance has been an outlier. While the regulation woes have weighed on pretty much every publically available Chinese company, they’ve been powerless in stopping the runaway freight train that is the S&P 500.
Sure, this month’s drama surrounding Evergrande has taken a few percentage points off the beloved large-cap index, but we’re still within spitting distance of record highs.
As far as the price of FXI goes, we’re trending below the 200-day, 50-day, and 20-day moving averages. Sure, Wednesday’s Federal Reserve-inspired bounce saw a nice volume uptick, but it didn’t exactly change the trend’s trajectory.
We’ve seen scores of retracements over the past eight months. None have been able to turn the tide. This is the backdrop against which you should analyze BABA stock. Even if its price were trying to turn higher, it’s fighting an uphill battle until FXI can move into a sustainable uptrend.
BABA Stock Charts
When focusing on the day-to-day of BABA, it’s easy to lose sight of just how far the tech giant has fallen. At around $150, it’s officially back to levels first seen in 2017. That’s five years’ worth of gains wiped out. By comparison, the S&P 500 would have to get cut nearly in half to return to similar levels. So, yeah, Wall Street hates Alibaba right now.
If you’re wondering where the next major long-term support zone is, consider $130 your target. It marked the low of the Q4 2018 temper tantrum and could bring buyers to the yard. But it isn’t for another $20 lower. Even then, it’s not like any other potential weekly floor has been strong enough to turn the current trend, so we’ll have to see.
As for the daily view, there aren’t many constructive things to say. All major moving averages are pointing lower, and Alibaba’s price is down about $30 over the past three weeks. Oversold conditions do suggest a bounce is due so I could see a contrarian bullish play if you’re willing to bet against the trend. Here’s how I’d play it.
Contrarian Trade: Sell the November $120/$115 bull put spread for 55 cents.
As long as BABA sits above $120 at expiration, you’ll capture the max gain of $55 per spread.
My second trade idea is to simply bet on the downtrend continuing by purchasing put spreads.
Trend Continuation Trade: Buy the November $150/$135 put vertical for $5.
You’re risking $5 for the potential to capture $10 if prices fall below $135 over the next two months.
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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