BABA Stock: Sitting in No Man’s Land
I was fortunate to write a report on Alibaba Group Holding Ltd (NYSE:BABA) stock just as a massive run was in development. I outlined that BABA stock was setting up to put in a long-term bottom, and it needed to close above a certain level of resistance, which would open up the price objective of $110.00.
The next day, BABA stock closed above resistance and surged to $110.00 in short order. The price objective suggested by the bottoming pattern had been fulfilled, and I have been waiting for a constructive pattern to develop that will dictate where this bull market will take BABA stock next.
All that waiting has produced little, and the price has now gone full circle. Alibaba stock is now in danger of falling below the critical level of support. This is the same level that first suggested that a bull market had begun. I do not use the term “critical” lightly, because failing to hold above this level would negate the bullish bias that was generated in August of this year.
The following BABA stock chart illustrates the year-to-date performance and the levels of support that must hold.
Chart courtesy of StockCharts.com
BABA stock is currently testing two levels of price support. It is imperative that one of these levels hold, or this could spell an end to the bull market that began in early August of this year.
The first level of support comes in the form of the 200-day moving average. 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, and when a share price is below this 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 $88.38, and BABA stock is trading slightly below it.
The second level of support sits slightly below the 200-day moving average, and it is the previous level of resistance that contained the price in the first half of this year. The break above this level in August is what confirmed that a bull market had initiated in Alibaba stock. This level now marks critical support.
Trading back to test this level from above is not uncommon. If BABA stock can remain above this level, it will serve to reaffirm that the previous level of resistance is now a new level of support.
Both levels of support will attract buying pressure, and it increases the odds that support will hold.
The following Alibaba stock chart illustrates the level to which the bulls need to succumb.
Chart courtesy of StockCharts.com
Since Alibaba stock peaked in early October, a downtrend has developed. This downtrend highlighted in purple is created by using a trend line that connects the peaks that appear on the price chart. A downtrend is a bearish trend that is defined by lower lows and lower highs. This trend can be easily identified as the price moves from the upper left to the lower right on the BABA stock chart.
As long as Alibaba stock is trading below this trend line, it increases the chances that critical support will fall. In order for the bulls to once again gain momentum and control of Alibaba stock, the price needs to close above this trend line while maintaining critical support.
The price has very little wiggle room left, as BABA stock sits in no man’s land. The good news is that a resolution is imminent.
Bottom Line on BABA Stock
BABA stock has gone full circle since the chart first suggested that a bull market had begun. In order for my bullish view to stand, price support must hold, and Alibaba stock needs to close above the downtrend line.