Alibaba Stock Could Fail the December Breakout

Chinese e-commerce giant Alibaba Group Holdings Limited (BABA) is trading lower by more than 3% in Thursday's pre-market session after reporting in-line third quarter 2019 revenues and beating earnings per share (EPS) estimates by a wide margin. Revenues rose an impressive 37.7% year over year to RMB 161.5 billion, or around $23.1 billion. Renewed fears about the coronavirus outbreak may have dampened a more bullish reaction, with world bourses turning sharply lower overnight in reaction to the latest data.

Alibaba stock has outperformed other Chinese equities during the outbreak and was trading just seven points below January's all-time high ahead of this morning's report. Even so, it has been a wild ride so far in 2020, with wild price swings keeping investors with weak stomachs on the sidelines. Unfortunately, high volatility is unlikely to ease until outbreak numbers turn sharply lower and local industries resume normal operations.

BABA Long-Term Chart (2014 – 2020)

The Hangzhou, China-based company came public on the U.S. exchanges in September 2014, opening in the low $90s and dropping into the low $80s a few weeks later. The subsequent uptick reached a new high in October, ahead of continued upside into the November peak at $120.00. That marked the highest high for nearly three years, giving way to a multi-wave correction that posted an all-time low at $57.20 in September 2015.

A successful February 2016 retest carved the last leg of a double bottom reversal, setting the stage for a strong uptrend that completed the round trip into the 2014 high in May 2017. An immediate breakout attracted steady buying interest, adding another 86 points into the January 2018 peak at $205.69. A June breakout attempt failed, yielding a downturn that broke 12-month range support in the $160s in August.

The downtrend found support near $130 in November and December, giving way to a two-legged advance that reached the 2018 high in December 2019. The stock broke out a few days later and posted an all-time high at $231.14 on Jan. 13, when the virus outbreak triggered a steep reversal. Price action since that time marks an ongoing test of the December breakout, with violent swings across that level highlighting the battle between bulls and bears.

The monthly stochastic oscillator crossed into a long-term buy cycle in September 2019 and reached the overbought zone in December. It has now posted a bearish crossover that will set off a sell signal if the blue line drops below the 80% level. That would take just a few down days at this point, warning shareholders that the December breakout could soon fail and trigger a larger-scale decline. 

BABA Short-Term Chart (2018 – 2020)

The on-balance volume (OBV) accumulation-distribution indicator topped out in June 2018 after a long accumulation phase and turned sharply lower, posting a two-year low in January 2019. It posted an even lower low when the second quarter sell-off posted a higher low, generating a bearish divergence that resolved for one or two January 2020 sessions when price and volume posted new highs. Unfortunately, high volatility since that time has dropped OBV under 2018 resistance, raising the odds that price will soon follow.

It makes sense for sidelined investors to sit on their hands, watching the trading range in place since mid-January. Right now, price action has drawn the outline of a symmetrical triangle that usually marks a continuation pattern, but confidence is low due to the broad price swings. In any case, this stock will take its lead from local headlines, which might not improve until this spring when the weather gets hot in China.

The Bottom Line

Alibaba is trading lower after a strong quarterly report, with investors more focused on the potential impact of the coronavirus on future earnings.

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