All Eyes on Alibaba Stock as It Sets Up for a Move
BABA Stock Shows Bullish Price Behavior
As an analyst who bases his investment views and strategies on technical analysis, I am completely enamored with investments like Alibaba Group Holding Ltd (NYSE:BABA) stock.
This adoration stems from BABA stock’s constructive price behavior and its adherence to technical rules. The stock is now within the confines of a technical pattern, and a resolution of this price pattern will dictate the next direction in the price.
To clarify, if anyone is slightly confused, I base my investment views and strategies on technical analysis. This form of investment analysis relies on past volume and price data to discern trends and forecast future prices. As silly as this notion may sound, I have been refining my skills using this method for close to two decades, and have found much success in using this method.
It was this method of analysis that first suggested that a bullish view on Alibaba stock was warranted on August 12, 2016, and this same method was the basis of my publication in which I chose BABA as a top pick for 2017. I am a proponent of technical analysis and, although this method is not perfect, it has yet to steer me wrong on this investment, as BABA continues to adhere to the rules set out by this style of investment analysis.
The following price chart illustrates this adherence in action, and pinpoints the events in early January that warranted a bullish view on Alibaba shares.
Chart courtesy of StockCharts.com
In late December 2016, the Alibaba share price was testing a very important level of support. I labeled this level as “critical” because my original bullish view on Alibaba was created when the price crossed this level in August 2016. In a previous report on this company, I outlined that it was imperative that the price of BABA stock remain above this level; failure to hold this level would suggest that a larger sell-off was set to ensue.
The downdraft that created this test of support was very orderly, as a downtrend effectively contained the price as it drifted lower. This downtrend is highlighted on the chart above, and it is simply created by connecting the peaks on the price chart.
For three months, this downtrend contained the price until support was finally tested. Support held and the price quickly turned higher and broke above resistance outlined by the downward-sloping trend line. This successful test of support and the breakout above the downtrend line were all I needed to create the view that Alibaba was a top stock pick for 2017.
The following BABA price chart illustrates the bullish signals that began to mount, supporting the notion of higher prices.
Chart courtesy of StockCharts.com
In late January of this year, the moving average convergence/divergence (MACD) indicator in the lower panel of the above chart generated a bullish signal. MACD is a simple and effective trend-following momentum indicator, which uses signal-line crosses to distinguish between bullish and bearish momentum.
The bullish signal is suggesting that bullish momentum has completely overwhelmed any bearish momentum, and higher prices can be expected because this signal suggests that the path of least resistance is toward higher prices.
This indicator is created by using a weekly scale and this serves to smooth the indicator, as well as add more credence to the actual signals when they are given.
The following Alibaba stock chart illustrates the bullish price action that followed the successful test of critical support, and the break above the downtrend line.
Chart courtesy of StockCharts.com
The price action that followed the view that BABA stock was a top pick for 2017, has been nothing short of bullish.
Bullish price action consists of impulse waves that advance the price, and consolidation waves that unwind any overbought conditions and set up the next impulse wave. This alternating wave structure is the necessary building block of a sustainable trend.
The bounce off of critical support was initiated by an impulse wave, which was quickly followed up by a brief consolidation wave that extended into another impulse wave. In a matter of weeks, BABA rose from a low of $86.00 to a high of $104.00, representing an impressive return of 20%.
For the last four weeks, Alibaba has been trading within the confines of a trading range that defines the current consolidation wave. A break above $104.00 would suggest that higher prices are likely to follow, and a break below $100.00 would suggest lower prices.
I am leaning toward the bullish camp because the price action and the signals that preceded this consolidation wave have remained bullish, supporting the notion that higher prices can be expected.
Bottom Line on Alibaba Stock
I am bullish on BABA stock because it continues to exhibit bullish technical tendencies that support the view that higher prices are likely to follow. Alibaba stock is currently within the confines of a technical pattern, and a bullish resolution of this pattern would serve to reaffirm my bullish view.
