Shares of Alibaba Group Holding Ltd (NYSE:BABA) have soared 98% year-to-date. Yup … take some time to digest this sentence. While the stock looks notably overbought through a multimonth/multiquarter lens, momentum in the near-term remains positive and could see stock chasers push it well above the all-time highs from August.
Aside from speaking with institutional investors, part of my daily phone call and meeting routine includes speaking with about 3 to 5 (clubhouse members – many retail investors) each day.
Over the past two weeks I have had an unusually high amount of people ask me the same question: “Serge, what do you think of Chinese internet stocks?”
While it makes sense to get more around these stocks given their rally in recent months, it does also make me perk up and take notice as the smell of an “overcrowded” trade is becoming increasingly clear.
With this in mind however let’s also not forget that in the end everything is a matter of timing and thus time-frames.
BABA Stock Charts
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
On the multiyear weekly chart, we see that after struggling through 2015 and 2016, BABA stock began to take off to the upside in a big way in early 2017. The theme has been restlessness all year and continues to this day. Trend followers have had an amazing time with this stock, yet from a momentum perspective the going is getting increasingly frothy at these levels.
To be clear, I am a big believer in the Alibaba story and do think that the stock ultimately can go much higher. Through the intermediate term (i.e multimonth/quarter), however, it would likely be wise to tread lightly in this stock.
Moving averages legend: blue – 21-day, yellow – 50-day
On the daily chart we see a stock that has had tremendous respect for its 21-day and 50-day simple moving averages all year (blue and yellow lines respectively). These are also the lines that from a near-term trend following and “breakout trading” perspective should, in my eye, be respected.
Trade Idea No. 1: A break and hold below the 21-day (currently around $168) should lead to a re-test of the 50-day (currently around $158). And a break below the 50-day would endanger the year-to-date up-trend and an initial downside target closer to $150.
Trade Idea No. 2: With the marginal breakout move (out of the consolidation phase marked by the purple lines) from Monday, the $180 area becomes the next upside target, possibly followed by $190 and $200. Any meaningful bearish reversal is a stop loss from a swing trading perspective.
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Source: Investor Place