Alibaba (NYSE:BABA) continues to fly high. BABA stock has risen more than 25% in the past two weeks from recent lows near $140.
Certainly, some of the rally was warranted given the previous punishing sell-off.
The rip-roaring rally has come too far, too fast now, and it’s time to be a seller of BABA on another bounce higher.
The big rip to the upside was based on the news that Alibaba is launching a new server chip.
The chip will hopefully allow Alibaba to better compete with both Amazon (NASDQ:AMZN) and Microsoft (NASDAQ:MSFT) in the cloud computing space.
While Alibaba is the leader in cloud computing in China, it trails badly both Amazon and Microsoft in the international arena. Good luck competing with those two behemoths.
Plus the new chip and services related to the chip are months away at best. Look for reality to set in and BABA stock to start to stall.
Technical Take on BABA Stock
Alibaba is getting extremely overbought on a technical basis, the 9 day RSI just raced above 75. MACD breached 3.5 and is nearing the highest readings of the past year.
Momentum is at an extreme as well. BABA is trading at the biggest premium to the widely followed 20 day moving average over the prior twelve months.
The last time all these indicators aligned in a similar manner marked a significant intermediate-term top in the stock (highlighted in the chart). Expect the same over the coming weeks.
Seasonality also comes into play for Alibaba. While December tends to be very bullish for U.S. stocks, it is not the case for BABA.
In fact, December has been by far the worst month for Alibaba stock over the past eight years. Shares were positive in just one of the past eight years.
The average loss for December in that same time frame was 5.7%. Maybe Chinese stocks don’t believe in the Santa Claus rally.
My viewpoint wasn’t always less than bullish on BABA. I had a decidedly bullish stance in my prior article on Alibaba from Oct. 1.
BABA stock was trading near the $150 level at that time and was deeply oversold. I recommended an out-of-the-money $135/$130 bull put spread which has worked out well.
Alibaba stock has risen over 15% since that analysis was published at the beginning of the month. Oversold has become overbought. Understandably my viewpoint has changed in kind. Price does matter.
While it’s not time to be a raging bear yet on BABA, it is time to take a more neutral stance given the recent red-hot rally.
InvestorPlace contributor Tezcan Gecgil has a more bullish long-term view but still stresses caution as well. She highlights the ongoing governmental concerns still surrounding Alibaba and other Chinese names.
These regulatory issues may only get worse in the coming months according to Gecgil. Even a long-term bull such as she recommends waiting for a pullback to $155 to get into BABA stock.
How to Trade Alibaba Now
Sell BABA Dec $200/$210 call spread for $1.50 net credit.
The maximum gain on the trade is $150 per spread. The maximum risk is $850 per spread. Return on risk is 17.64% for a 59-day holding period. This equates to a 173% annualized return.
The short $200 strike provides a 23 point (13%) upside cushion to the $177 closing price of BABA stock. It expires in the seasonally difficult performance month of December as well.
On the date of publication, Tim Biggam 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.
Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, 4 years as Lead Options Strategist at ThinkorSwim and 3 years as a Market Maker for First Options in Chicago. Tim has appeared on PBS and the Nightly Business report, while maintaining weekly appearance on Bloomberg TV and CBOE-TV to discuss everything from volatility to LEAPs. Tim has also been invited for reoccurring appearances on CNBC’s Volatility Playbook.
