Converging stock catalysts

09/11/19
  • BABA dropped more than broad market yesterday
  • Stock up around 27% YTD, near key resistance level
  • Favorable trade, central bank tailwinds possible as BABA investor day approaches

Sometimes a larger-than-expected price drop is a bad thing, sometimes it may be the opposite.

Alibaba (BABA)—aka “The Amazon of China”—dropped as much as 3.1% yesterday, while the Nasdaq 100 (NDX) was down around 1.1% at its low point and the MSCI China ETF was off 0.9%. The move dropped BABA shares a little further away from the resistance level defined by the July–August highs (around $180) that the stock just tested again a few days ago:

Alibaba (BABA), 4/26/19–9/10/19. Alibaba (BABA) price chart. Pulled back from resistance.

Source: Power E*TRADE


It’s hardly unusual for an individual stock to be more volatile than an index or an ETF, but since yesterday marked the official departure of BABA founder and Chairman Jack Ma (“The Jeff Bezos of…” ok, enough), we can surmise the stock’s drop may have been temporarily exaggerated by the “Alibaba CEO steps down” headlines all over the internet yesterday morning. By midday BABA shares were down less than 2%.

As Ma announced his departure a year ago, and yesterday was just the official passing of the BABA baton to current CEO Daniel Zhang, it may not seem possible that such news would have any effect on the stock, but stranger things have happened in the markets. The important point is that BABA pulled back at an interesting time:

1. The US-China trade war is in a “truce” phase, with talks scheduled to resume next month.

2. The Federal Reserve is expected to cut interest rates a week from today, and many other central banks around the world are expected to make policy announcements this week and next.

3. Alibaba’s annual investor “day” is also around the corner, on September 23-24.

Just a refresher for those with short memories: News that the US and China would resume trade talks was the catalyst for last Thursday’s stock surge, which produced trading range breakouts in most US stock indexes and pushed BABA to the very top of its recent consolidation. (The MSCI China ETF also jumped, and subsequently pushed to its highest level since August 1 on Monday.)

Second, although a Fed rate cut is widely expected next week, many traders will likely be expecting some bullish enthusiasm to kick in when the announcement actually occurs—especially if other central banks indicate they’re on the same page.

Finally, like any other corporation, Alibaba will seek to put its best foot forward during its investor pow-wow. Recent numbers suggest it may not have to do much spin: Revenue grew 42% in Q2 and earnings improved 56% from the previous year.1

Alibaba (BABA), 4/23/18–9/10/19. Alibaba (BABA) weekly price chart. Upside milestones.

Source: Power E*TRADE


The weekly price chart above shows the 2019 high around $196 and the all-time high around $212 are likely the most conspicuous longer-term targets for bulls who see BABA breaking out above its near-term resistance.

As the next two weeks bring together many factors that could trigger a breakout above that near-term resistance level, many discount-minded traders could be paying special attention to BABA on days it falls more than the broad market.

Market Mover Update: Auto components stocks have been one of the S&P 500’s hottest industry groups over the past five days (+12%), while semiconductors (+7%) have carried the tech sector, and commercial banks (+7.6%) have been driving financials (see “Breaking down a breakout”).

Activision Blizzard’s (ATVI) gain yesterday extended the stock’s rally since September 3 to nearly 9% (see “Gamers starting to show game”).

Today’s numbers (all times ET): Producer Price Index, PPI (8:30 a.m.), Wholesale Trade (10 a.m.), EIA Petroleum Status Report (10 a.m.).

Today’s earnings include: Aurora Cannabis (ACB), Oxford Industries (OXM).

 

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1 Barron’s. Buy Alibaba Now Ahead of Its Investor Day, Analyst Says. 9/10/19.

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