Alibaba Stock Provides A Trade For Bulls, Bears: Here's How To Trade This Pattern

Alibaba Group Holdings, Ltd BABA was trading over 5% lower on Tuesday amid an ongoing COVID-19 surge in China that has been met with intensifying restrictions, lockdowns in cities across the country and workplace closures.

Chinese stocks recently received a temporary boost after the China Securities Regulatory Commission revised its stance to allow U.S. regulators on-site and for China-based companies to share sensitive data.

The boost was short-lived, however, partly due to Alibaba’s chart, which shows the stock is trading in a downtrend between two parallel trendlines within a falling channel pattern.

The pattern is bearish for the short term, but can be bullish down the road.

• For bearish traders, the "trend is your friend" (until it's not) and the stock is likely to continue downwards. Aggressive traders may decide to short the stock at the upper trendline and exit the trade at the lower trendline.
• Bullish traders will want to watch for a break up from the upper descending trendline, on high volume, for an entry. When a stock breaks up from a descending channel, it's a powerful reversal signal and indicates a rally is likely in the cards.
• See Also: Why Alibaba, Baidu And Nio Shares Are Trading Lower

The Alibaba Chart: Between March 15 and March 23, Alibaba soared 70% higher, but has since dropped into a falling channel pattern on the daily chart. Within the pattern, Alibaba has made a consistent series of lower highs and lower lows, with the most recent lower low printed on March 31 at $108.71 and the most recent lower high created at the $118.22 level on Monday.

• It should be noted that the current falling channel on the daily chart could form into the flag formation of a weekly bull flag pattern.
• Traders and investors can watch for a break up from the falling channel on higher-than-average volume to indicate a reversal is in the cards. If the stock breaks up from the pattern, the measured move of the weekly bull flag indicates Alibaba could trade up toward the $185 level.
• The decline on Tuesday was on lower-than-average volume, which indicates consolidation rather than fear. By early afternoon, only about 20 million Alibaba shares had exchanged hands, compared to the 10-day average of 48.08 million.
• There's a gap below on Alibaba’s chart between $80.14 and $87.12, which may give bullish traders pause because gaps on charts are about 90% likely to fill. There are also three gaps above on Alibaba’s chart that are also likely to fill in the future, with the highest gap ranging up near the $220 level.
• Alibaba has resistance above at $121.95 and $130 and support below at $110.06 and $104.44.

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See Also: How to Read Candlestick Charts for Beginners

Photo: Courtesy of Leon Lee on Flickr