Alibaba Group Holding (BABA) has been a great success story for Jack Ma and early investors like Softbank (SFTBF) . But the stock has been under pressure since reaching a high around $315 in late 2020. BABA has tumbled lower and lower and one Real Money subscriber emailed me for an update.
In our last update on May 26 we wrote that "Traders should continue to hold longs from our May 13th recommendation. Keep the stop loss at $200. Add to longs or initiate longs on strength above $218.10." Prices made a weak recovery to around $230 and then resumed the decline to stop us out at $200.
Now what? Have prices declined enough to discount all the possible bad news ahead? Let's check the charts again.
In this daily bar chart of BABA, below, we can see that prices tumbled to an early October low and then made a weak bounce of around $40 per share. This rebound was a good percentage trade for the nimble but trading volume did not increase and the On-Balance-Volume (OBV) line did not break its long-running downtrend. The bounce was doomed to fail.
Prices gapped lower the other day and trading volume spiked. The heavier trading volume tells me that traders voted with their feet and sold. Some may suggest this was the final throw in the towel selling but it is too soon to be certain. The OBV line is pointed down and the Moving Average Convergence Divergence (MACD) oscillator is back below the zero line.
In this weekly Japanese candlestick chart of BABA, below, we see a mixed picture. The longer-term trend remains negative. Prices are below the declining 40-week moving average line. The weekly OBV line has been in a decline since February.
The 12-week price momentum study shows a large bullish divergence from January to September with equal lows in momentum when prices made lower lows. In addition, the downside momentum has been quickly losing steam since late September.
In this daily Point and Figure chart of BABA, below, we can see that prices have reached a downside price target.
In this weekly Point and Figure chart of BABA, below, we can see a potential downside price target in the $112 area.
Bottom line strategy: There is only a little bit of trading around $140 in early October to offer as support so that is not a confidence builder in my book. This could be a low and a successful retest but I am cautious by nature. Let's stay on the sidelines and see how things develop.
