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Alibaba Group Holding Ltd Is Itching for a Breakout

Tyler Craig

My daily scouring of internet stocks revealed a lovely little breakout pattern developing in Alibaba Group Holding Ltd (NYSE:BABA). Setups like this are the breeding ground for big-league profits. Let’s dig into the BABA stock chart below and identify how to trade it.

For proper perspective, we begin with a weekly chart. Alibaba stock has spent the past six months carving out a sideways trading range. After such a robust rally in 2017, I consider any and all chop a welcome development. It’s allowing the stock to digest the gains and build a base for future advances.

Source: OptionsAnalytix

The recent ramp carried BABA back to the upper end of its range, resulting in yet another resistance test. With the broader market now warming up, I think the chances of breaking out are high.

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On the daily chart, Alibaba scored a strong post-earnings rally with heavy volume to boot. Remember, positive earnings reactions often set a bullish tone for the entire quarter. I fully expect the excitement to persist which should deliver additional upside in the coming days.

Source: OptionsAnalytix

The past week and a half of churn has formed a clean high base pattern. The fact that BABA has given back so little of its post-earnings gains is a positive omen. It means any supply coming into the market up here is being gobbled up post haste. Once the supply finally dries up, this pup is going higher.

Time to Go Gaga for BABA Stock

With implied volatility dwindling, Alibaba stock options are once again cheap. Couple that with the potential for a big breakout and I thinking an aggressive bull call spread play is in order.

Buy the July $200/$210 bull call spread for $3.80. The risk is limited to the initial investment, and the max reward is $6.20. If BABA can lift to $210 by expiration, you’re looking at a potential 163% return on investment.

As of this writing, Tyler Craig held bullish positions in BABA. Want more education on how to trade? Check out his trading blog, Tales of a Technician.

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