BABA Stock: Bullish Foundation
Alibaba Group Holding Ltd (NYSE:BABA) stock has a couple of catalysts that could send the BABA stock price moving. The direction of trading is in question, because one catalyst is bearish and the other is bullish.
The bullish catalyst is that November 11 is Singles’ Day in China, and Alibaba has managed to turn this holiday into a shopping bonanza. In recognition of the day, young singles celebrate and shop online. Singles’ Day has become the largest online shopping day in the world. Last year’s record was $14.3 billion, and this year is set to top that number. This could create a bullish tailwind for BABA stock.
The bearish catalyst is that China’s currency, the yuan, is headed for its steepest weekly drop since January. The central bank has just set its fixing rate below 6.8 yuan per U.S. dollar for the first time in more than six years. Alibaba reports earnings in U.S. dollars, and earnings projections will need to be adjusted to account for a lower yuan. This could create a bearish headwind for BABA stock as earnings are adjusted lower.
I have been bullish on BABA stock, since a technical pattern suggested that higher prices were likely. My initial target of $110.00 was reached in early September, and Alibaba stock has been trending lower since.
There are two levels of support that can halt this share price weakness, and I have highlighted them on the Alibaba stock chart below.
Chart courtesy of StockCharts.com
I first became bullish on BABA stock on August 10, 2016, when the price generated a double bottom. A double bottom is a pattern that appears at the end of a bearish trend and signals a reversal. It is marked by two consecutive bottoms, separated by a peak in between. The pattern is confirmed when shares close above the peak that separates the two bottoms.
Double bottom patterns are also of great benefit because, not only do they signal a change in trend, they produce a possible price objective. This reversal pattern projects a potential price target of $110.00 on Alibaba stock, and this level was attained in late September 2016.
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It is not uncommon for a stock price to trade back and test previous levels of resistance that have now become support. The first level of support is highlighted in pink, and this level is generated from the breakaway gap. The second level of support is highlighted in blue, and it is generated by using the peak that acted as a previous level of resistance and confirmed the double bottom pattern.
The following Alibaba stock chart illustrates other indicators that reaffirm these levels of support.
Chart courtesy of StockCharts.com
In April 2016, Alibaba stock produced a golden cross. A golden cross is a bullish signal that is produced when a 50-day moving average (highlighted in blue) crosses above a 200-day moving average (highlighted in red). This signal confirms that a bull market is on the horizon, and bullish setups have a higher probability of success when this signal is engaged.
The trend line highlighted in blue in the BABA stock chart above illustrates the uptrend that has developed off of the lows. The trend line is generated by connecting the troughs on the price chart. This trend line coincides with the first level of support generated by the breakaway gap on the first chart.
The 200-day moving average is the dividing line between stocks trading in a bull market versus stocks trading in a bear market. When a share price is above the moving average, it is bullish. When a share price is below the moving average, it is bearish. Traders eye this moving average, and it is not uncommon for a price to find support as it approaches this level. This moving average is currently sitting at $85.00, and horizontal support illustrated on this first chart coincides with the second level of support .
Both levels of support will attract buying pressure, and I do not believe that these levels will be broken at this moment.
Bottom Line on Alibaba Stock
There are numerous headwinds that can cause Alibaba stock to swing up and down, but as long as BABA stock is trading above support and the signals continue to support a bullish view, I will be looking for bullish setups.