On May 6, Alibaba (NYSE:BABA) stock had a big spike but that immediately reversed and failed into a 25% correction that took it from $195 to $148 per share in a under a month. Luckily for investors, Alibaba stock recently recovered $20 from the bottom. The opportunity today is that it may not be done yet as we can clearly see from this morning’s rally.
For BABA, there is likely more upside in this move, even after a strong recovery bounce. A similar pattern unfolded in late January and early February. The stock had bottomed hard then rallied 15%. It came into resistance, overcame it and proceeded to more than double the rally.
When all was said and done, Alibaba stock had rallied almost 50% off the low.
It will need help from the stock market in general and those are looking frisky after last week. In spite of all the geopolitical worries, equity markets continue to climb the wall of worry. The headlines are scary but the global central banks are committed to propping up the markets. Even the U.S. Federal Reserve has renewed its dovish stance on economies. It will be hard for sellers to fight the Fed.
Usually there are two reasons to buy a stock. The first is fundamental, where we invest in it for the long term. The second is tactical, where we speculate on the shorter-term results. Most investments fall under one or the other.
But some opportunities come that fit both goals simultaneously and such is the case here for BABA. It current carries a strong momentum rally that could double, yet it is still low relative to its all-time highs, so it’s a good long-term opportunity at the same time. This rebound could lift it so it can recover lost glory.
Fundamentally, BABA, while not cheap at price to earnings ratio of 35X and 8X sales, it’s not completely bloated. This is a successful e-commerce giant that has had a lot of unusual headwinds mostly from the geopolitical environment.
There are artificial forces from the economic war between the U.S. and China that are exerting transient downside pressure on its stock. Eventually maybe even hopefully soon after this weekend these pressures will abate and equities like BABA stock will be free to trade on merit.
Meanwhile, the technical opportunity here is also viable.
BABA originally earned the label that it was “the Amazon (NASDAQ:AMZN) of China.” But Alibaba stock resembles Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) more. Either way, this is good company for it to keep.
Amazon is closer to its all-time high and toying with a trend line that could launch it into open air. GOOGL has just bounced off the May lows and is attacking important resistance zones on its way to recover levels closer to its highs. Either of these stocks will be great tethers for BABA stock. I bet that at least one of these proxies will finish its rally and take BABA with it.
Bottom Line on Alibaba Stock
Now the bad news … if we simply look at the scoreboard, markets have not made much progress in almost 18 months. This is what most experts say about the strength of the stock market. The S&P 500 fell off a cliff early in 2018 and has spent over a year just to get back to the accident scene. So the bears are comfortable here that they can keep a lid on equities.
But I see it differently because Wall Street has had a gamete of problems thrown at it from global economic wars, to nuclear missile tests flying over our friends. We also had unrest in the middle east, and a combative Federal Reserve head Jerome Powell. Yet, the bulls keep coming back up to the line to face the sellers once more. Eventually, one of these efforts will punch through the resistance and set new highs.
There are too many skeptics still, either short or on the sidelines, and they will pile back and the rally will be fierce. I know this sounds too easy but it is a realistic scenario. Moreover, if it doesn’t happen, the economic conditions with the Fed’s help are strong enough to ensure that if the rally fails, the bottom is shallow. This is the definition of upside potential outweighing the downside risk.
In summary, Alibaba stock has the momentum it needs to recover the ledge it lost on May 6 and use it as a launching pad to embark on a secondary rally to set new all-time highs. There will be resistance areas — the most prominent is around $185 per share — but this stock can do it if the politicians give it a chance.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room free here.
