One Real Money subscriber sent an email asking me to look at Alibaba ( BABA) . In our last review back on May 26 we saw some positive developments and recommended 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."
Things soured in July and traders should have stopped themselves out at $200 and walked away. How are the charts looking now?
In this updated daily bar chart of BABA, below, we can see that prices have continued to sink lower after being stopped out. Prices are trading below the declining 50-day moving average line and below the slower-to-react 200-day moving average line whose slope turned negative in May. Trading volume has increased on the decline in July and August and that tells you that traders are voting with their feet.
Using math, the On-Balance-Volume (OBV) line is pointed down as sellers of BABA remain more aggressive. The 12-day price momentum study shows a low in August and a higher low in September for a bullish divergence (prices are going down but the indicator is improving). This divergence may not be big enough to reverse the negative sentiment around Chinese companies.
In this weekly Japanese candlestick chart of BABA, below, we still see a negative picture. Prices are in a downtrend as they trade below the declining 40-week moving average line. Prices are back to levels not seen since late 2018 which tells us that traders have little to no interest in defending old support areas.
The weekly OBV line is bearish and the 12-week momentum study has not yet started to show improvement - the pace of the decline has not begun to slow.
In this daily Point and Figure chart of BABA, below, we can see a downside price target in the $132 area.
In this weekly Point and Figure chart of BABA, below, we used close only price data. Here the software is projecting the $89 area as a possible price target.
Bottom line strategy: The decline in BABA and Wall Street's current distrust of Chinese securities reminds me of Wall Street's avoidance of fossil fuel names. The trend is likely to continue until investors believe it is grossly overdone. Avoid BABA until the tide shifts and a new and durable base pattern develops.
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