Shares of Alibaba Group Holding Limited (BABA) were hit hard on Friday on the notion that the Trump Administration was considering limiting direct investments between the United States and China, with the threat that Chinese stocks trading as American Depository Receipts (ADRs) in the United States might be delisted. Over the weekend, these tensions eased, as Oct. 1 is China's 70th Anniversary National Day. China is celebrating 70 years as a Communist nation while Hong Kong protests.
Alibaba has bettered earnings per share (EPS) estimates for the past four quarters, but the stock fell by a bear market 38% from its all-time intraday high of $211.70 set on June 5, 2018, down to its Dec. 24 low of $129.77. The stock is a pure trade on technical momentum, as its P/E ratio is 35.09 without offering a dividend, according to Macrotrends.
Alibaba is a Chinese online retailer that has benefited from its cloud computing and e-commerce revenue, which is growing faster than its traditional web-based retailing. The stock closed Monday, Sept. 30, at $167.23. up 22% year to date and in bull market territory at 28.9% above its Dec. 24 low of $129.77. Alibaba stock set its 2019 high of $195.72 on May 3 and is in correction territory at 14.6% below this level.
The daily chart for Alibaba
The daily chart for Alibaba shows the bear market decline from the June 5, 2018, high of $211.70. The close of $137.07 at the end of 2018 was an input to my proprietary analytics, and its annual pivot remains at $159.91. The close of $169.45 on June 28 was also an input and resulted in the semiannual risky level at $189.61. The close of $167.23 on Sept. 30 was the most recent input to my analytics, which resulted in the monthly pivot for October at $176.48 and the fourth quarter pivot at $167.22. As you can see, the bear market consolidation has been extremely volatile.
The weekly chart for Alibaba
The weekly chart for Alibaba is negative, with the stock below its five-week modified moving average of $171.08. This indicates risk to the 200-week simple moving average, or "reversion to the mean," at $140.30, which has never been tested.
The 12 x 3 x 3 weekly slow stochastic reading is projected to decline to 72.45 this week, down from 78.86 on Sept. 27. During the week of April 26, just before the 2019 high, this reading was 91.20, which is above the 90.00 threshold, as the stock became an "inflated parabolic bubble." This typically leads to a 10% to 20% decline. So far, the decline has been 14.5%.
Trading strategy: Buy Alibaba shares on weakness to the annual pivot at $159.91 and to its "reversion to the mean" at $140.30. Reduce holdings on strength to the monthly and semiannual risky levels at $176.48 and $189.61, respectively. Its quarterly pivot is $167.22.
How to use my value levels and risky levels: Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual, and annual closes. The first set of levels was based upon the closes on Dec. 31. The original annual level remains in play. The monthly level changes at the end of each month, most recently on Sept. 30. The quarterly level was also changed at the end of September.
My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.
How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.
The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.
The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. Recently, I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble," as a bubble always pops. I also refer to a reading below 10.00 as "too cheap to ignore."
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.