Alibaba Group Holding Limited (BABA) stock has risen more than 15 points in the past two weeks, lifting the Chinese internet giant to an all-time high. Even so, the stock's lofty price structure could soon trigger a steep fall from grace, generating windfall profits for aggressive short sellers. While that decline might not end the trend advance that started in November 2016, long-term sell signals are likely to go off, generating a stiff headwind into the first quarter of 2018.

The stock has been on fire this year, more than doubling in price while posting a long series of new highs. The steep trajectory looks climactic, eventually requiring months or years to work off historically extreme overbought technical readings. Even so, only the most aggressive and battle-hardened short sellers should consider exposure right here, because well-honed risk management skills will be needed to avoid major losses. (See also: Risks of Short Selling.)

Any downturn will also affect Altaba Inc. (AABA), the holding company for Yahoo! Inc. assets not bought by Verizon Communications Inc. (VZ) in the massive June acquisition. Altaba holds a 15% stake in Alibaba, valued at $362 billion in August, when the stock was trading 20 points lower. That security is also trading at an all-time high after gaining more than 30% since the split-up.

BABA Weekly Chart (2014 – 2017)

The company came public on the U.S. exchanges in September 2014, opening in the low $90s ahead of a steady uptick that topped out at $120 in November. It then sold off, cutting through the first public print in January 2015 and continuing lower into the second quarter. Support in the low $80s broke during the August mini flash crash, giving way to a weak bounce that tested the sell-off low in the mid-$60s in September. (For more, check out: Alibaba IPO: Why List in the U.S.?)

The stock posted a double bottom and turned higher into 2016, stalling in the mid-$80s and dropping into another test at the 2015 low. That price action finally ended the 15-month downtrend, yielding a stair-step rally that reached within a few points of 2014 resistance in October. A rounded consolidation into April 2017 completed the handle of a multi-year cup and handle pattern, generating a powerful breakout that has added more than 70 points in just six months.

The uptrend reached the measured move target at $181 in September, doubling the depth of the 2014 into 2016 decline. Weekly and monthly stochastics oscillators have been glued to overbought levels for months, in alignment with the powerful trend advance, but the stock has not corrected more than 13 points since the fourth quarter of 2016. This extreme imbalance raises the odds for a steep decline that shakes out a massive supply of complacent shareholders. (See also: Is It Too Late to Buy Alibaba Stock?)

BABA Daily Chart (2016 – 2017)

The stock turned higher in December 2016, breaking out a few months later and accelerating to the upside in June after the Verizon/Yahoo deal. The huge gap between $125 and $132 posted at that time remains unfilled, generating a magnetic target that might be reached during a downturn. The stock's technical character changed once again after the Aug. 17 gap, with price the reaching the harmonic reward target and easing into a shallow channel between the $160s and $180s.

It bounced at channel support on Sept. 27 and has now reached channel resistance. This marks a perfect spot for the start of a steep downturn that rewards well-timed short sales. More importantly, the price rate of change is slumping badly, failing to reward shareholders while raising the odds that the next sell-off will break the channel, fill the August gap and drop the stock into an intermediate correction. (For more, see: Alibaba Doubles Research Spending to $15B.)

The Bottom Line

Alibaba has rewarded buyers with impressive 2017 gains but is extremely overbought after reaching the long-term measured move target, and the stock could turn lower in a correction that targets the upper $120s. Aggressive short sellers may wish to enter countertrend positions, utilizing strict risk management techniques to limit losses if the stock breaks the two-month channel to the upside. (For additional reading, check out: Alibaba to Launch a Robotic Gas Station.)

<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>

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