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08/22/18
After nearly doubling in price in 2017, Chinese e-commerce giant Alibaba (BABA)—aka, the “Amazon of China”—has been challenged to match that type of performance thus far this year. (It’s hardly alone in that regard.) It managed to bang out a new record high in late January and another one in early June, but the daily chart below shows this year’s price action has been more of a slowly-expanding trading range than an uptrend:
Alibaba (BABA), 4/17/17–8/21/18. Alibaba (BABA) daily price chart. Nearly one year of support

Source: OptionsHouse

What the chart mostly shows, though, is a whopper of a support zone (roughly around $166) dating back to September of last year. BABA has since returned to test that zone six times, most recently last week when it dipped to $165.39 and then quickly rebounded around $11 over the next couple of days.

A lot of traders would argue that there are two basic ways to look at a longstanding support level like this. The first perspective would be that the repeated tests of this zone make it a good general level to go long. After all, the smallest rebound off of it was the $17.50 (10.5%) pop in April, and until the stock penetrates it to the downside, many traders would look for this tendency to repeat. The underlying logic is that whenever BABA has dropped to this level, buyers have—demonstrably—stepped in to support the stock, perhaps suggesting certain traders and investors see value at this level.

Another camp of traders may argue that the stock’s inability to mount a clear, extended uptrend in a while suggests the stock is potentially vulnerable to selling pressures—say, a down move in the broader market or a bearish stock-specific event—that could trigger a break below support. And because many traders often place their stop-loss orders a little below obvious support levels like the one in BABA, the move can gain momentum quickly as those orders get triggered—a plus for short-side traders, but a risk for longs.

Alibaba is scheduled to release earnings tomorrow, and some market watchers are eagerly anticipating what, if anything, the company may have to say about the impact of the US-China tariff spat, and whether BABA’s big investments in new retail initiatives (including online pharma, cloud computing, and a partnership with Starbucks) are on track to pay off.1

Regardless of the news out of the earnings call, the support zone will loom large.

Market Mover Update: From the “Well, It’s About Time” Department, at around 12:52 ET yesterday the S&P 500 (SPX) made a new all-time high, ticking above 2873 to top its previous record of 2872.87 from January.

 

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1 MarketWatch. Alibaba earnings: Spending for a future beyond e-commerce. 8/13/18.