Alibaba Stock: Technically and fundamentally low (NYSE: BABA)
The market is always one step ahead of information that is in the public domain. Therefore, in fact, the bottom of the news is like a rear view mirror for the market.
But, it is possible to only try to understand what is really going on by analyzing how the market behaves in response to the informational context. It is this analysis that I propose to make concerning Alibaba (NYSE: BABA).
I will start with a detailed analysis of the technical picture on several levels. This order is important, because I want my fundamental theses to be seen in the context of the conclusions of technical analysis.
Let’s start with the monthly chart.
Pay attention to the nature of the candlestick that formed in March. This candlestick had a wide range between high and low (~40%), but the open and close prices were almost at the same level. In the theory of technical analysis, such a figure is called “Dragonfly Doji” and as a rule, it positively characterizes the market:
It should also be added that this Doji coincided with record trading volume. The figure formed in the zone, which in 2015 and 2017 played the role of strong resistance and support.
Again, what happened in March. A record number of investors made the decision to buy or sell the company’s shares. Trading in March opened above $100, but the price then fell below $75 and by the end of the month, the price broke above $100 again. This is clear evidence that the ‘bulls’ were stronger than the ‘bears’. The record volume is further confirmation of this.
Let’s move on to the weekly chart and take a closer look at the corrective wave that started in October 2020.
In general, any directed wave is an alternation of local highs and lows. If the wave is bearish, then each new local low is lower than the previous one.
For the specified period, I have identified four these local funds (they are marked with a red pointer on the graph). Note that each time the next local background turned out to be lower than the previous one. But the last fund, local, turned out to be higher than the previous one:
If I am correct in my conclusions, this signifies the formation of a “double bottom” pattern and the end of the downward corrective wave.
Next, let’s look at the daily chart. Over the past year, three shortcomings can be identified here. Two of them were bearish, I mean the price then fell below the level of the gap. But the last gap was bullish. The price did not fall below the level of this gap. It also indicates a trend reversal.
And finally, the last technical indicator, which I propose to pay attention to.
Investment analysis theory has a tool such as the Beta coefficient. In a very simplified way, this coefficient shows to what extent the price of a given share is likely to move in the same direction as the market.
But with this coefficient, you can calculate the “bullish” and “bearish” beta. These coefficients describe the behavior of the stock only when the market is up and only when the market is down.
And now let’s look at these coefficients in the case of Alibaba. We see that for the first time in a long time, the “bullish” beta has consistently outperformed the “bearish” beta. This is statistical evidence that Alibaba stock is now more inclined to react to positive market momentum.
So, in my view, the technical picture of the market indicates quite strongly a high probability that Alibaba shares have bottomed.
Before I start this block, I will tell a story from my experience.
About a decade ago, I traded wheat options (CBOT). The USDA once released a relatively positive report in which it significantly reduced its wheat production forecast. But to my surprise, the price of wheat fell quickly and sharply thereafter. Later, my broker explained to me that the price of wheat before the publication of the report already assumed such a forecast. And so followed the profit taking of large investors, naturally at the expense of small traders like me.
In my opinion, it is very important to assess the correlation between market behavior and the information we have. At the same time, we must understand that the news we have read has most likely already affected the market.
What is the news saying last month? The fact that due to strict quarantine measures, the Chinese economy is slowing down. In March, the country recorded the largest decline in consumer spending (-3.5%) and the highest unemployment rate (5.8%) since the start of the pandemic. Of course, this cannot have a positive impact on Alibaba’s business. This is reflected in deteriorating expectations for the company’s revenue and EPS for the current year and next year:
And yet, despite this clearly negative information backdrop, as seen in the previous block, Alibaba’s price is showing clear signs of reversal.
It appears that stocks that investors are now selling under the influence of negative news background are quickly being bought up by other investors who are aiming for a more distant future. In this situation, you have to decide which side you are on.
This is my subjective opinion. But in the end, this site was created with the aim of exchanging our subjective opinions.
As oild0382 rightly pointed out in a comment to my last article, you can’t read the news that Alibaba’s stock has bottomed out. By the time it becomes clear to everyone that the stock has reached the bottom and everyone will write about it, the stock price will already be 30% above the level of this bottom.
I don’t know the future and I could certainly be wrong. But by putting together the technical and fundamental pictures, I think with a very high probability, we can say that the bottom for Alibaba has indeed been reached.