Alibaba Group Holding Ltd: A Significant Top in BABA Stock Has Been Established

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BABA Stock: Minimum Downside Objective of $120.00

Picking tops and bottoms in the stock market sounds like an increasingly difficult venture, but I assure you it is not impossible, especially when you stick to the basics.

For example, a bullish trend is characterized by price action that consisting of a series of higher highs and higher lows. A bearish trend is the complete opposite: lower highs and lower lows. The transition from one trend into the other is how a top or a bottom can be identified.

In order to illustrates this concept  I am focusing on Alibaba Group Holding Ltd (NYSE:BABA) because there are number of indications suggestion that BABA stock has already put in a significant top. All the indications I am going to be referring to are all technical in nature, which means they all based on the price action that has already occurred on the corresponding stock chart.

The first indication suggesting that a significant top has already been put in is highlighted below:

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Chart courtesy of StockCharts.com

This Alibaba stock chart captures a trend that began in February 2016, when the stock began making a series of higher highs and higher lows.

This trend has been in development for two and a half years, and in that time frame, BABA stock has appreciated by 250%.

The uptrend line annotated on the chart above was created by connecting the series of lower highs that characterized this bullish trend. This trend line acted as significant level of price support, and as long as Alibaba stock was trading above it, one could only assume that bull market was in development.

This all changed on August 2018, when BABA stock broke below this uptrend line. Highlighted as a breakdown on the chart above, it is simply suggesting that the bullish trend that was so prolific for that last two and half years has finally come to an end.

This break was not the first in indication suggesting that BABA stock was putting in a significant top. The price action was already alluding to such an outcome.

The following chart captures the price action of a bullish trend slowly transitioning into a bearish trend:

Chart courtesy of StockCharts.com

The pattern highlighted on the stock chart is a “rounded top.” This pattern captures a slow transition from a bullish trend into a bearish one. In essence, it shows the effects of a stock distribution, as institutional and savvy investors sell their respective position to unsuspecting investors who still believe that a bullish trend is in development.

This pattern was contained a significant level of price support that resided at $165.00. This price point acted as a floor while the trend was slowly transitioning.

In September, BABA stock broke below this level of price support, which ultimately completed the pattern. This suggested that a significant top had been put in. It is worth noting that this break also created a lower low, implying the start of a new bearish trend.

In the days that followed, Alibaba stock returned to the test the price point that had acted as a floor. This type of price action is called a backtest, and it reaffirms that the break below support was legitimate.

The stock price tried numerous times to regain its footing above $165.00. But all the attempts were thwarted, and lower stock prices have continued.

The great thing about the structure of this rounded top is that is can also be used derive a price objective for the bearish move that is expected to follow.

This objective is obtained by taking the height of rounded top and extrapolating that value beneath the level of price support responsible for creating the pattern. Putting this process to work suggests that the minimum downside objective for Alibaba is currently $120.00.

Analyst Take

Numerous indications are suggesting that a significant top has already been put in regarding Alibaba Group Holding Ltd. What’s more, a trend towards a lower Alibaba stock price is now in development.