$185 looks like a top for Alibaba Group Holding Limited (NYSE:BABA) … time to become a BABA stock bear
Shares of Alibaba (NYSE:BABA) are struggling to head higher after a monster move off the recent lows. Alibaba stock had been off to a torrid 2019, heading higher by over 30% so far this year. The past few days, however, have seen that red-hot rally begin to fizzle. Time to short an overvalued and overbought BABA now that the momentum has broken.
The fundamentals are looking a little rich at current levels.
BABA’s price-to-earnings ratio is now over 35 and at the highest readings over the past six months. The previous time BABA carried such a lofty multiple marked a significant high in Alibaba stock. Other metrics, such as price-to-sales and price-to-free cash flow paint a similar picture.
The technical backdrop is decidedly bearish as well. The 14-day RSI had reached the most overbought levels of the past year before weakening. The previous time it approached such extremes coincided with a major top in BABA stock. The MACD remains in negative territory, another bearish sign. There is major overhead resistance at the $185 area as well.
Most importantly, Alibaba stock tried and failed twice over the past two days to break out past $185. This type of rejection at major resistance is many times a sign that the buyers may finally be getting exhausted. A break below the 20-day moving average at the $180 area could be the catalyst for a further leg lower.
Longer-term investors should look to short Alibaba on any further rallies. Shorter-term option traders may want to consider selling the April $187.50 calls and buying the April $190 calls for a 50 cents net credit. This bearish call credit spread has a maximum gain of $50 per spread with a maximum risk of $200 per spread. Return on risk is 25%. The short $187.50 put provides a 3.3% upside cushion to the $181.74 closing price of Alibaba stock.
Earnings are due May 1, so the option spread will expire before then and avoid any earnings-related risk.
Overall, the bias in prices is: Upwards.
The projected upper bound is: 187.72.
The projected lower bound is: 169.96.
The projected closing price is: 178.84.
A black body occurred (because prices closed lower than they opened).
During the past 10 bars, there have been 5 white candles and 5 black candles. During the past 50 bars, there have been 28 white candles and 22 black candles for a net of 6 white candles.
A falling window occurred (where the bottom of the previous shadow is above the top of the current shadow). This usually implies a continuation of a bearish trend. There have been 6 falling windows in the last 50 candles–this makes the current falling window even more bearish.
Momentum is a general term used to describe the speed at which prices move over a given time period. Generally, changes in momentum tend to lead to changes in prices. This expert shows the current values of four popular momentum indicators.
One method of interpreting the Stochastic Oscillator is looking for overbought areas (above 80) and oversold areas (below 20). The Stochastic Oscillator is 45.2007. This is not an overbought or oversold reading. The last signal was a buy 17 period(s) ago.
Relative Strength Index (RSI)
The RSI shows overbought (above 70) and oversold (below 30) areas. The current value of the RSI is 50.09. This is not a topping or bottoming area. A buy or sell signal is generated when the RSI moves out of an overbought/oversold area. The last signal was a sell 20 period(s) ago.
Commodity Channel Index (CCI)
The CCI shows overbought (above 100) and oversold (below -100) areas. The current value of the CCI is -50. This is not a topping or bottoming area. The last signal was a sell 1 period(s) ago.
The Moving Average Convergence/Divergence indicator (MACD) gives signals when it crosses its 9 period signal line. The last signal was a sell 19 period(s) ago.
Rex Takasugi – TD Profile
ALIBABA GRP ADR closed down -3.420 at 178.320. Volume was 35% above average (neutral) and Bollinger Bands were 66% narrower than normal.
Open High Low Close Volume___
179.940 180.700 176.800 178.320 4,706,720
Short Term: Neutral
Intermediate Term: Bearish
Long Term: Bullish
Moving Averages: 10-period 50-period 200-period
Close: 179.28 174.57 166.14
Volatility: 29 33 43
Volume: 2,460,291 2,841,522 4,039,352
Short-term traders should pay closer attention to buy/sell arrows while intermediate/long-term traders should place greater emphasis on the Bullish or Bearish trend reflected in the lower ribbon.
ALIBABA GRP ADR gapped down today (bearish) on normal volume. Possibility of a Runaway Gap which usually signifies a continuation of the trend. Four types of price gaps exist – Common, Breakaway, Runaway, and Exhaustion. Gaps acts as support/resistance.
ALIBABA GRP ADR is currently 7.3% above its 200-period moving average and is in an downward trend. Volatility is relatively normal as compared to the average volatility over the last 10 periods. Our volume indicators reflect volume flowing into and out of BABA.N at a relatively equal pace (neutral). Our trend forecasting oscillators are currently bearish on BABA.N and have had this outlook for the last 9 periods.