Alibaba's Stock Broke Out: What's Next?

Alibaba Group Holding Limited BABA has been a frustrating stock for traders and investors since reaching an all-time high of $319.32 way back on Oct. 27 of last year.

The stock has been in a massive downtrend and had lost over 35% of its value when it found a May 13 bottom of $204.39. Any attempt for the stock to reverse the trend and move north has been marred by yet another U.S. sanction headline relating to China or the Chinese government’s own criticism of CEO Jack Ma and the multi-national technology company.

On June 23, Alibaba finally bucked the downtrend and made a reversal. And on Monday, while the stock consolidated on lower timeframes, a number of options traders piled into the stock. One trader purchased $516,120 worth of call contracts of Alibaba when he bought 1380 options with a strike price of $230. The contract expires this Friday and the trader paid $3.74 a piece.

The stock has room to move if it can pop over the $231 level.

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The Alibaba Chart: Alibaba ran into resistance at $231.27 and began to consolidate. The stock had gained about 8% over the past four trading days and a consolidation day is needed if Alibaba’s stock should continue to climb.

The breakout on Alibaba happened on June 23 when the stock popped above the downward sloping trendline that had been holding it down since last October.

The move also caused the eight-day exponential moving average (EMA) to cross above the 21-day EMA, which is bullish. Alibaba is now trading above both commonly followed EMAs, which gives bulls more confidence going forward.

The stock is trading about 10% below the 200-day simple moving average, which indicates overall sentiment in Alibaba is currently bearish. It has some work to do yet to recapture that level.

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Bulls want to see Alibaba create a bullish pattern under its upper resistance level, such as a bull flag, and for bullish volume to come in and drive Alibaba above $231.27. If it can reclaim that level as support, it has room to move up to $239.09.

Bears want to see Alibaba’s stock continue to reject its upper resistance and for bearish volume to drive it back down below the $224.38 level. If the stock were to lose that level as support it could fall toward $218.23.

BABA Price Action: Shares of Alibaba traded down 0.4% to $227.68 at publication time.

Photo: The Conmunity - Pop Culture Geek, via Wikimedia Commons