China bellwether shifts momentum

06/06/19
  • Alibaba sold off in May as trade-war salvos escalated
  • Despite 41% December–May rally, BABA is near its mid–2017 levels
  • Yesterday’s intraday reversal set up challenge to recent swing low

As the trade war slogs on (yes, that again), US traders and investors are understandably more focused on the fate of US companies and stocks, but there are more than a few big Chinese companies that trade on US exchanges, and they offer a look into how the US–China skirmish looks on the other side of the battlefield.

And traders should pay attention.

Although internet colossus Alibaba (BABA) is routinely singled out as the Chinese tech company—it’s “China’s Amazon” and Asia’s premier cloud provider,1 among other market-leading ventures—BABA stock has probably frustrated some investors over the past 18 months or so.

To date, the robust part of its rally arguably peaked in August 2017, when the stock tagged $177, more than tripling its 2015 low of $57.20:

Alibaba (BABA), 12/9/16–6/5/19. Alibaba (BABA) price chart. Choppy since Aug. 2017.

Source: Power E*TRADE


Swing traders have probably been happier with the stock since then. BABA made several record highs (most recently in June 2018), but always in stair-step fashion: Surges to new peaks were repeatedly reversed by equally sharp sell-offs—lather, rinse, repeat. The stock has yet to recoup what it lost in the late-2018 stock purge (despite a 41% rally off its December low) and as of yesterday it was trading lower than it was in August 2017, having dropped more than 20% from its early-May high as firing resumed in the trade war.

If the International Monetary Fund’s (IMF) recent downsizing of its economic outlook for China2 wasn’t enough to convince you, BABA’s latest retracement offers at least one piece of tangible evidence that market fear isn’t limited to one side of the trade-war divide. BABA is likely just as much a hostage to trade-war headlines—or the absence thereof—as any US stock. In short, it could jump on good headlines, or tank on bad ones.

Right now, the latter is probably the more pressing concern.

Alibaba (BABA), 10/23/18–6/5/19. Alibaba (BABA) price chart. Rebound, interrupted.

Source: Power E*TRADE


Yesterday’s downturn in BABA shares despite mostly green international markets and a US market extending its huge Tuesday rally highlighted the stock’s proximity to last Friday’s swing low around $148 (chart above). BABA also enjoyed a big rally on Tuesday, but after pushing to a higher high early yesterday, it reversed and traded below Tuesday’s low—a so-called “outside day” (or “engulfing” day), which some traders see as a sentiment/momentum shift that has potential follow-through implications.

There may be something to this, since over the past five years BABA has tended to trade more bearishly than bullishly immediately after these types moves—that is, a down-closing outside day that immediately follows an up day like Tuesday. The day after (today, in this case) BABA closed higher nine times out of 20. The odds of a higher close were 50-50 for the next two days, but only 30% on day 4.3

Bottom line, if this slight bearish tendency plays out this time, it could lead to a break below last Friday’s swing low—and traders will then be considering the likelihood of another challenge to the support level defined by the October-December lows.

But if Friday’s low holds, bulls could be looking for BABA to return to its early year form.

Market Mover Update: Yesterday the SPX added a second day to a rebound off the 38.2% retracement level of its December–May rally (see “Looking for a bounce”).

Crude oil took another hit yesterday, with the July WTI crude oil futures contract (CLN9) tumbling more than -4% intraday and dropping below $51/barrel for the first time since January 8.

Today’s numbers (all times ET): International Trade (8:30 a.m.), Productivity and Costs (8:30 a.m.), EIA Natural Gas Report (10:30 a.m.).

Today’s earnings include: At Home Group (HOME), Ciena (CIEN), J.M. Smucker (SJM), Beyond Meat (BYND), DocuSign (DOCU), Guess (GES), Ollie's Bargain Outlet (OLLI), Vail Resorts (MTN), Zoom Video (ZM).

 

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1 Asian Review. Amazon prepares to battle with Alibaba in Asia's cloud. 5/4/19.

2 Reuters. Citing trade tensions, IMF cuts China 2019 GDP growth forecast to 6.2% from 6.3%. June 5.

3 Supporting document available upon request.

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