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The equity markets are in flux this week, but mainly because of investor sentiment. In fact, the reason behind the jitters among traders is a bunch of good news. The U.S. Federal Reserve is now considering accelerating its monetary tightening programs. Stocks are under pressure, but the selling is spotty. Alibaba (NYSE:BABA) stock has not been lucky for a while. But it has done well in recent days even when markets were down. Today we will consider the opportunity of a miracle recovery in the stock this year.
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But first we must address the status quo on Wall Street in general. The bulls are still in charge, but they are leery. It’s almost like they have one foot out the door already. The only reason the Fed is ending its quantitative easing is because the economic reports are too good now. Eventually that is a good problem to have.
Last week’s labor report showed that the U.S. unemployment rate is below 4%. This will force Fed chair Jerome Powell and his posse to focus more on controlling inflation. Investors worry about that, because the Fed has a history of not getting things quite right. The fear is that they could over-tighten the conditions and create problems for company earnings. None of this is actually materializing in the current company results.
Alibaba has not suffered this tremendous decline in its stock because of bad earnings reports. Nor have they warned about worsening sales conditions. The main risks in BABA stock are the overall market malaise, and the political threat from the Chinese government. The de-listing of Didi (NYSE:DIDI) sparked panic selling in the entire the Chinese stocks cohort.
BABA Stock Is on Solid Fundamental Grounds
Source: Charts by TradingView
BABA stock is at an extremely low point. Fundamentally, it is almost three times cheaper than Apple (NASDAQ:AAPL) from the price-to-sales perspective. BABA’s trailing 12 months price-to-earnings ratio is now 17.5, which is too cheap for a mega growth company. Revenues and gross profits are now more than two times larger than 2018. Clearly they are executing well on plans.
Buying the stock now is not likely to be a financial disaster unless from political problems. The stock chart has been in sequential declines of lower-highs and lower-lows since October 2020. Even after this significant bounce, it is still 60% below that high watermark. Last week it showed promise of building a bottom again. I say “again” because they tried that before, so stay skeptical.
So far, every bounce that looked like a bottom ended up in tears and trapped more bulls. The next battle should be near $140. Last week BABA stock made a stance during tough market conditions. These could be signs that they may finally be ready to base this time.
Bulls and Bears Will Face Off Soon
Soon there will be a face-off between this higher-low trend versus the 15 months old negative trend. The battle will be epic, and hopefully it happens before the earnings report. The bulls will have the opportunity to continue on with an ascending trend for the next few months. This will not be easy, but it may yield tremendous results by spring.
I noted the upcoming earnings, because it will add a significant wild card soon. The short term price action from those headlines is completely binary. It is imperative that investors continue to treat the stock as toxic so they don’t suffer too much. So, for political reasons and the upcoming earnings risk, I would deem this opportunity highly speculative. This means that the size of the risk should be appropriate, and you should have tight stop losses.
The weekly charts suggest upside targets that may extend to $230 per share. But there are many other levels to consider first. BABA stock needs to get through $140 per share. There will also be tough resistances at $175 and $195 per share.
It is wild to look up that high when it has been a stock crash unfolding in slow motion. It is sad to see such a tremendous earner lose all credibility on Wall Street. I don’t blame the investors, because politicians are incredibly unpredictable. In order to achieve their goals, they are willing to go to extremes. Since I am not a political expert, I downgrade my conviction level on purpose to medium.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.
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