Alibaba Group Holding Ltd: BABA Stock Will Continue to Soar

Alibaba StockBABA Stock: Bullish Bliss

Alibaba Group Holding Ltd (NYSE:BABA) reported third-quarter earnings before the opening bell on January 24, 2017, and to the delight of investors, it posted beatings on both the top and bottom lines. BABA stock is set to trade higher as a result.

2017 is proving to be fruitful for Alibaba stock investors because BABA stock was already up 11% for the year prior to this third-quarter earnings announcement. The year-to-date performance comes as no surprise, because I outlined in my previous publication, “Alibaba Group Holding Ltd: BABA Stock Is a 2017 Top Pick,” that there were numerous developments on the Alibaba stock chart that suggested higher prices were likely.

These developments began in late December, when BABA stock returned to test an important level of support that is illustrated on the Alibaba stock chart below.

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Chart courtesy of StockCharts.com

In late December, BABA stock returned to test an important level of support from above. I labeled this level as critical support because it was extremely important that BABA stock remain above this level or else it would have indicated that something more sinister was in the works.

The significance regarding this price level is that it acted as a previous level of resistance that contained the price of BABA stock in the first half of 2016. When Alibaba stock broke above this level in August, it generated a bullish backdrop, indicating that Alibaba stock was set to trend higher. Closing below this level would have erased this backdrop.

Testing support from above is not uncommon, especially when the level is as important and instrumental as this one. A successful test would reinforce the bullish backdrop, and traders would be eyeing this level as a possible entry point.

The following Alibaba stock chart illustrates the catalyst that reinforced a bullish view upon which the 2017 top pick was predicated.

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Chart courtesy of StockCharts.com

The price action, in which critical support was tested, was orderly and defined. A downtrend contained price as it drifted lower. Once support was tested, this downtrend, which was created by connecting the peaks on the price chart, was broken to the upside.

The breakout that is highlighted on the Alibaba stock chart above indicated that the trend towards lower prices had reversed, and that a new trend towards higher prices had begun. The fact this breakout occurred after a critical level of support was tested only served to reaffirm that the bullish backdrop was fully intact.

The price action that followed the breakout was both healthy and constructive. This price action is illustrated on the Alibaba stock chart below.

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Chart courtesy of StockCharts.com

The advance off the successful test of critical support was both healthy and constructive, which reinforces the notion that the trend is sustainable and higher BABA stock prices are likely.

Healthy trends are characterized by an impulse wave that advances price, and a consolidation wave that unwinds any overbought conditions that were created and sets up the next impulse wave. This alternating wave structure helps maintain an orderly trend. Orderly trends are sustainable, and most long-term bullish trends are predicated on such price action.

The advance off support is an impulse wave and is highlighted in green. The pennant that was created is a consolidation wave and is highlighted in purple. The breakout highlighted above occurred prior to the earnings report and implies that a new impulse wave was already in development.

This price action is constructive because the theory behind impulse waves that are separated by a consolidation wave is that these two impulse waves tend to mirror each other in terms of length. Applying this theory to the chart above creates a potential price objective on BABA stock between $105.00 and $106.00.

Bottom Line on BABA Stock

My 2017 top pick, BABA stock, is performing beautifully, and the reaction to earnings only serves to reinforce my bullish view. As long as the price action remains healthy and constructive, I will continue to hold a bullish view on Alibaba stock.