Alibaba Group Holding Limited (NYSE:BABA) optimism may be misguided

Alibaba Group Holding Limited (NYSE:BABA) optimism may be misguided

Alibaba Group Holding Limited (NYSE:BABA) optimism may be misguided

Alibaba Group Holding Ltd (NYSE: BABA) shares have held up relatively well up to this point in 2019 considering the beating other Chinese stocks have taken as the trade war between the U.S. and China has ramped up.

Alibaba’s stock jumped 4% on Tuesday, but some large bearish trades in the options market Tuesday morning suggest the optimism may be misguided.

The Trades

On Tuesday morning, Benzinga Pro subscribers received a series of options alerts related to Alibaba.

At 9:39 a.m., a trader bought 576 put options with a $177.50 strike price expiring on July 5 at the ask price of $14.35. The trade represented an $826,560 bearish bet at a break-even price of below $163.15.

Between 9:51 a.m. and 9:55 a.m., there were three large sales of Alibaba call options with a $175 strike price expiring on July 12 at bid prices ranging from $2.23 to $2.26. All together, the seller dumped 1,500 July 12 call options, a total bearish bet of more than $334,000.

A final trade went through about an hour later when a trader purchased 1,051 Alibaba put options at a $167.50 strike price that expire on Friday. The puts were purchased at the ask price of $2.252 and represent a roughly $236,685 bearish bet with a break-even price of below $165.25.

After all was said and done, the trading action represented an aggregate bearish bet of roughly $1.4 million on Alibaba.

Why It’s Important

Even traders who stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader.

Many of these large options traders are wealthy individuals or institutions who may have unique information or theses related to the underlying stock.

Unfortunately, stock traders often use the options market to hedge against their larger stock positions, and there’s no surefire way to determine if an options trade is a standalone position or a hedge. In this case, given the relatively large sizes of the Alibaba options trades, as well as the manner in which the large call sale was broken up into a series of three smaller orders, the trades could potentially represent institutional hedges against large bullish stock positions. Institutions often break up large orders into a series of smaller orders in an attempt to avoid drawing attention to their activity.

Trade Deal Optimism Overdone?

Assuming Tuesday’s trading action did not represent hedging, options traders seemed decidedly bearish about Alibaba and the potential for the U.S. and China to make meaningful progress toward a trade deal in the next month.

On Tuesday, U.S. President Donald Trump said he had a productive phone call with Chinese President Xi Jinping and the two plan to meet at the upcoming G-20 summit that begins on June 28. In the meantime, representatives from both nations will resume trade talks.

The latest trade war news comes after Alibaba disclosed in a recent filing that it’s proposing a one-to-eight stock split ahead of a rumored public listing in Kong Kong. In addition, Alibaba announced on Tuesday that CFO Maggie Wu would be taking over as the head of the company’s strategic acquisitions and investment unit.

Alibaba traded around $165.94 per share at time of publication.

Overall, the bias in prices is: Sideways.

The projected upper bound is: 175.44.

The projected lower bound is: 154.79.

The projected closing price is: 165.11.

Candlesticks

A white body occurred (because prices closed higher than they opened).
During the past 10 bars, there have been 4 white candles and 6 black candles for a net of 2 black candles. During the past 50 bars, there have been 25 white candles and 25 black candles.

A rising window occurred (where the top of the previous shadow is below the bottom of the current shadow). This usually implies a continuation of a bullish trend. There have been 3 rising windows in the last 50 candles–this makes the current rising window even more bullish.

Momentum Indicators

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.

Stochastic Oscillator

One method of interpreting the Stochastic Oscillator is looking for overbought areas (above 80) and oversold areas (below 20). The Stochastic Oscillator is 40.9962. This is not an overbought or oversold reading. The last signal was a sell 4 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 54.33. 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 buy 10 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 132.This is an overbought reading. However, a signal isn’t generated until the indicator crosses below 100. The last signal was a sell 2 period(s) ago.

MACD

The Moving Average Convergence/Divergence indicator (MACD) gives signals when it crosses its 9 period signal line. The last signal was a buy 8 period(s) ago.

Rex Takasugi – TD Profile

ALIBABA GRP ADR closed up 5.600 at 165.510. Volume was 116% above average (neutral) and Bollinger Bands were 18% narrower than normal.

Open High Low Close Volume___
163.120 169.100 161.955 165.510 7,399,567

Technical Outlook
Short Term: Neutral
Intermediate Term: Bearish
Long Term: Bullish

Moving Averages: 10-period 50-period 200-period
Close: 158.38 172.42 162.73
Volatility: 35 38 44
Volume: 4,297,411 3,996,328 4,010,227

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.

Summary

ALIBABA GRP ADR gapped up today (bullish) 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 1.7% above its 200-period moving average and is in an downward trend. Volatility is extremely low when compared to the average volatility over the last 10 periods. There is a good possibility that there will be an increase in volatility along with sharp price fluctuations in the near future. 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 27 periods.

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