BABA BOOM
02/02/18

While many traders probably spent a lot of time yesterday pondering the prospects of the scheduled post-close earnings from Amazon (AMZN), Apple (AAPL), and Google (GOOG), there were plenty of fireworks before the opening bell when China’s online commerce giant Alibaba (BABA) released its latest numbers.

The following two-minute chart shows the holding pattern the stock was stuck in on Wednesday in anticipation of its numbers, and its crash landing yesterday morning when shares traded down $13—more than 6%—at the beginning of the session, hitting $191.14.

Alibaba (BABA), 1/31/18 – 2/1/18

Source: OptionsHouse

Given that BABA was up 18% on the year through Wednesday, a lot of positive expectations may have already been baked into the stock price, so some letting-the-air-out-of-the-balloon action may have occurred post-earnings, anyway. But the headline numbers—the company missed slightly on earnings ($1.63 vs. $1.67) but beat on revenue ($12.76 vs. $12.13)—didn’t seem to merit such a dramatic response. Other stats appeared to be bullish: The company’s core e-commerce biz was up 57% from a year ago, net income was up was up 36%, and its cloud business doubled.1

But there was one other bit of interesting news, which may have caught the market off-guard: Alibaba announced it was going to acquire a 33% stake in Ant Financial, the affiliated fintech company that operates Alipay, BABA’s e-payment platform. The move was seen by some as a sign that an IPO is in the works for Ant, which has an estimated value of $60 billion.2 That may represent uncertainty to some, opportunity to others.

Alibaba (BABA), 5/25/17 – 2/1/18

Source: OptionsHouse

The daily chart above shows yesterday’s sell-off took prices to a conspicuous point: the resistance level around $191.75 that the stock blasted through on January 23-24 on its way to record highs. That level, which dates back to BABA’s November highs, is really the upper reaches of a choppy, sluggish consolidation period that arguably began in September.

After a price breakout, prices often reverse to test the breakout level before continuing their initial move. The ability to sustain prices above the level (in the case of an upside breakout) on a test is typically interpreted as “validation” of the original breakout.

While the theory is basically sound, in practice things are usually a bit messier. It’s unrealistic to expect such a test to exactly touch a breakout level and then reverse, so traders must usually accept a move in the general vicinity of that level. Also, intraday penetration of a key level is less significant than a daily (or longer-term) close below it.

And there may be multiple price levels to consider. In BABA’s case, for example, a representative trend line connecting the two most recent daily swing lows shows that, as big as yesterday’s down move was, the stock could arguably pull back to this line or a little below it (especially on an intraday basis) and still keep its overall uptrend intact. Bottom line, Alibaba is in a general technical “zone,” and potentially poised to tip its hand as to whether the recent breakout was the real deal or a head fake.

Every trade should have a well-defined “failure point”—conditions that shout, loud and clear: “The reason for getting into this trade is no longer valid, so GET OUT!” Those conditions can differ from trade to trade, but they always have to be translated into a specific price level. A market’s price action often provides good hints about where those levels are.

 

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1 MarketWatch. Alibaba stock falls on holiday-quarter earnings miss. 2/1/18.

2 TechCrunch. Alibaba is picking up 33% of Ant Financial, its fintech affiliate that's valued at over $60B. 2/1/18.