Alibaba Group Holding Limited (BABA) reported better-than-expected earnings when it released its first quarter results before the opening bell on Thursday, Aug. 15. The Chinese online retailer benefited from its cloud and e-commerce revenue, which grew faster than its traditional web-based retailing. The company expanded its user base to 674 million active customers. The resulting increased cash flow allows Alibaba to invest in new technologies to drive even faster digital initiatives around the globe.


The stock closed Wednesday, Aug. 14, at $162.06, up 18.2% year to date and in bull market territory at 24.9% above its Dec. 24 low of $129.77. The stock set its 2019 high of $195.72 on May 3 and is in correction territory at 17.2% below this level.


The daily chart for Alibaba


Refinitiv XENITH

The daily chart for Alibaba shows the formation of a “golden cross” on March 19, when the 50-day simple moving average (SMA) rose above the 200-day SMA average to indicate that higher prices would follow. The stock followed this buy signal to its 2019 high of $195.72 set on May 3.


It has been a volatile ride since this high, and the 50-day and 200-day SMAs have been magnets, now at $167.25 and $165.31, respectively. The annual pivot at $159.91 has been a magnet since May 22, including this week. The monthly, semiannual, and quarterly risky levels are $177.26, $189.61, and $200.74, respectively.


The weekly chart for Alibaba


Refinitiv XENITH

The weekly chart for Alibaba is negative, with the stock below its five-week modified moving average of $166.50 and above its 200-week SMA, or “reversion to the mean,” at $137.04, which has never been tested. The 12 x 3 x 3 weekly slow stochastic reading is projected to decline to 47.64 this week, down from 50.09 on Aug. 9. 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,” which typically leads to a 10% to 20% decline.


Trading strategy: Buy Alibaba shares on weakness to the annual pivot at $159.91 and to its “reversion to the mean” at $137.04. Reduce holdings on strength to the monthly, semiannual, and quarterly risky levels at $177.26, $189.61, and $200.74, respectively.


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 weekly level changes each week. The monthly level was changed at the end of each month, most recently on July 31. The quarterly level was changed at the end of June.


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.


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