Stock Of The Day: Will A 'Crowded Trade' Force Alibaba Lower?

Shares of Alibaba Group Holding Limited BABA are off slightly ahead of tomorrow's report. The company will release its earnings tomorrow and is scheduled to have a conference call at 7:30 AM EST to discuss the results.

Even if the earnings are good, there is a chance that the stock heads lower. This is why it is our Stock of the Day.

BABA has rallied by about 60% in just a few weeks. Analysts attribute this move to optimism around AI advancement.

This could set the stage for what traders call a ‘crowded trade'. This would be bearish for the stock.

It means that because investors think the earnings will be good, the vast majority purchase shares ahead of the release. This makes the market effectively run out of buyers.

Stocks don't move higher unless traders and investors who wish to buy push the price up. A market with no buyers can't go up.

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If the earnings are good and the stock doesn't rally, some will become concerned and may decide to sell.  But they will have a hard time finding buyers for their shares. They may need to push the price lower.

Others will see this and may decide to do the same. It could result in a snowball effect that results in a selloff even if the numbers beat expectations.

Technically, as you can see on the chart below, Alibaba is also extremely overbought.

This means the stock is trading above what would be its typical or normal range. Some technical traders will be anticipating a reversion to the mean or move lower. They may enter the market as sellers and this could put downward pressure on the stock.

The shares are also testing resistance around $124.00. The last three times they hit this level a selloff followed.

Resistance is a price level where there is a large amount of sell interest. Stocks can sell off of resistance if some of the people who created the resistance become willing to accept lower prices and start to undercut each other.

Excessive optimism about the earnings release, being overbought, and being at resistance means BABA may be about to head lower. Even if the earnings are good.

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