Warning: This Stock Has 8% Downside

Like many large-cap “tech-related” names, shares of Alibaba Group Holding Ltd (NYSE:BABA), with gains of over 55%, are significantly higher year-to-date.

While the underlying growth story in BABA stock is alive and well, the spike in tech-stock volatility in recent days is now developing a significant bearish reversal that, from Wednesday’s closing price, in my eye has about another 8% of downside potential as a next better downside target.

To be clear and before looking at the charts, I remain a bull in shares of Alibaba through the intermediate to longer term, just like I am on many other techy names like Facebook Inc (NASDAQ:FB) and many more.

Just because I am bullish in those time frames, however, does not mean I also have to be bullish at any price in the immediate to near term.

In fact, through the lens of risk management, taking “some off” i.e. partial profits at the top end of a trading range is at least as healthy as buying on a retracement.

BABA Stock Charts

The multiyear weekly chart tells us much of what we need to know about BABA stock through the longer-term lens. Note that after a long climb out of the 2015 abyss, the stock last month (May) finally broke past its post-IPO highs from 2014. This was a constructive move no doubt.

However, classic technical analysis dictates not to chase charts higher or lower in these time frames. Classic theory also tells us that major breakouts such as these eventually stand a good chance to see a retracement to the previous resistance area as it gets tested for support.

On the daily chart, we see that the breakout rally from May went into vertical overshooting mode in early June. The “exhaustion gap rally” from June 8 came on the back of positive wording from Alibaba’s CFO, who said she sees revenue growth near 50% for the fiscal year 2018.

Since then, however, BABA stock has been visibly sluggish and now threatens to mean-revert back toward the closing price from June 7, which would fill the June 8 up-gap and also get the stock back into its year-to-date up-trending channel (purple-dotted parallels).

Mean-reversion patterns such as this are important technical signals that can lead to high-probability setups, and for those unfamiliar, I’ll be hosting a special webinar June 15 for InvestorPlace readers to explain these signals and how to turn them into winning trades.

Specifically, if BABA breaks and holds below $135.50, then traders could get an opportunity to short the stock, buy put options or put spreads or even sell call spreads. The initial price target then becomes the mid $120s, which would get the stock back into the aforementioned up-trending channel as well as back to its yellow 21-day simple moving average.

— Serge Berger

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Source: Investor Place



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