Alibaba Group Holding (BABA) - Get Alibaba Group Holding Ltd. Sponsored ADR Report was rising Friday on better-than-expected revenue led by cloud computing. The stock has been consolidating a bear market decline and remains in a trading range. My call is to buy weakness to its quarterly pivot at $167.22 and to sell strength to its semiannual risky level at $189.61 which defines the trading range.
Alibaba has now bettered earnings-per-share estimates for five consecutive quarters. The highlight of the report was growth in cloud computing as revenue for this segment rose to $1.3 billion. The Chinese online retailer indicated that 59% of companies listed in China are customers of the Alibaba Cloud. For more details, here's the analysis as posted by TheStreet.
The stock is consolidating a bear market decline of 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 37.40 without offering a dividend, according to Macrotrends.
Alibaba closed Thursday at $176.67 up 28.9% year to date and in bull market territory 36.1% above its Dec. 24 low of $129.77. This 2019 performance has the stock 9.7% below its May 3 high of $195.72.
The daily chart for Alibaba
Courtesy of Refinitiv XENITH
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 $161.39. The close of $169.45 on June 28 was an input that resulted in the semiannual risky level at $189.61. The close of $167.23 on Sept. 30 was an input to my analytics resulted in the fourth quarter pivot at $167.22. The close of $176.67 on Oct. 31 was an input that set the November value level at $162.62.
The weekly chart for Alibaba
Courtesy of Refinitiv XENITH
The weekly chart for Alibaba is positive with the stock above its five-week modified moving average of $173.66 and well above its 200-week simple moving average or "reversion to the mean" at $142.17 which has never been tested. The 12x3x3 weekly slow stochastic reading is projected to rise to 65.70 this week up from 64.23 on Oct. 25. 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" and the stock declined 24% from its May 3 high of $195.72 to its May 31 low of $147.95.
Trading Strategy: Buy weakness to its quarterly, monthly and annual value levels at $167.22, $162.62 and $161.39, respectively, and reduce holdings on strength to its semiannual risky level at $189.61.
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, the latest on Oct. 31. The quarterly level was changed at the end of Sept.
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 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 its time horizon expires.
How to use 12x3x3 Weekly Slow Stochastic Readings:
My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing 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 call a reading below 10.00 as being "too cheap to ignore."
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Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.