Alibaba Stock Rally Still Has $15 To Go
Alibaba (NYSE:BABA) stock is still trying to recover from the correction that started in early May. Back then BABA stock spiked and looked like it was headed above $200 only to fail in a giant reversal that took it all the way down to $148 per share.
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Year-to-date Alibaba stock is up almost 30% and about 10 points better than the S&P 500. It is important to note that this is five times better than the iShares China Large-Cap ETF (NYSEARCA:FXI). Baidu (NASDAQ:BIDU) is down 27% for the same period. Clearly, BABA is leading the pack of Chinese stocks.
Now BABA stock sits smack dab in the middle of that range. The action now has tightened into a point, so there will soon be a big move. But the direction is not yet clear, and therein lies the opportunity.
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If I own Alibaba shares for the long term then I would stay with it. But if I’m looking to trade it for the shorter term then there are clear levels to chase in either direction. But first let’s look at the fundamentals.
Alibaba Stock Has the Value to Support $15 Rally Soon
BABA stock was once dubbed the Amazon of China, but the similarities end with that label. Unlike Amazon, BABA is more unilateral in its efforts. However its fundamentals are solid for its own right. Meaning the stock is not bloated given the performance that it has been delivering over the years.
So this is a proven management team and they deserve the benefit of the doubt. So from the trading perspective, as long as BABA stock is holding above $171 per share I favor the upside breakout more so then a break down.
Moreover, if the bulls can breakthrough $180 per share, they could invite more momentum buyers to rekindle the rally and recover the level they lost back in early May.
This week, the news from the negotiations between the U.S. and China soured, so this put downside pressure on all Chinese stocks. But today, the Federal reserve could cause a market-wide move based on what they do with rate cuts and what they say about policy going forward.
Political Rhetoric Holding BABA Stock Back
So Alibaba stock could go for a ride from outside factors. But for as long at it continues to set higher lows while it attacks the $180 per share neckline, I favor an imminent breakout for at least $10 from there.
For those who prefer using options, the easier trade would be to sell downside puts into what others fear and generate income out of thin air. For example, I can sell the January BABA $125 put and collect $1.20. This way I won’t even need a rally this year to win. As long as BABA stock stays above my level then I win 100%. Otherwise, I own the shares and would suffer losses below $123.80 per share.
It is important to note that the S&P 500 is still near all-time highs, so all bullish trades at these altitudes are risky. So it is important that I leave room for error. Meaning I don’t take full positions all at once so I can add to them if markets correct a little.
Market experts in the media are focused too much on when and how much the Fed will cut rates. They are missing the point, because what matters most is that the Fed will cut rates if we need it.
In essence, the Fed’s willingness to cut rates means that there is a net below us on Wall Street. This dovish posture, while it cannot completely eliminate the possibility of a dip, gives traders the courage to buy stocks if and when they correct.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room free here.
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