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A Trade Emerges in Alibaba Stock as Berkshire’s Munger Reportedly Buys

Alibaba stock is trying to rotate over December's high, giving bulls a potential long setup. Here's how to lay it out.

Alibaba  (BABA) - Get Alibaba Group Holding Ltd. Report stock has been a poor investment for more than a year now.

Shares peaked in October 2020 just shy of $320 and fell more than 65% to last month’s low.

However, Alibaba stock could be setting up as a buy now.

The stock is bouncing nicely on the day, although it’s off its session high. Still, shares are up by about 3% on the day and flirting with a monthly-up rotation by clearing the December high at $129.45.

It comes after Jeffrey Gundlach called China “uninvestable” and after Berkshire Hathaway’s  (BRK.B) - Get Berkshire Hathaway Inc. Class B Report  (BRK.A) - Get Berkshire Hathaway Inc. Class A Report Charlie Munger has reportedly been building a position in Alibaba.

For the week, Alibaba stock is up 9% and is working on its second straight weekly gain. Currently up almost 20% from the December low and bulls are looking for considerably more upside from here.

Trading Alibaba Stock

Daily chart of Alibaba stock.

Daily chart of Alibaba stock.

Shares are bouncing off the $120 area and amid the recent rally, are trying to clear the $129.50 area.

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It ran as high as $133.88 on Friday, but I'm waiting for a daily close to see if the stock can get a larger rotation (a monthly rotation) in play.

While it looks like smooth sailing ahead on the monthly chart, keep in mind that on the smaller time frames, there are obstacles.

For instance, Alibaba stock is running into the declining 10-day moving average today. So that’s one reason I want to see a daily close above $129.50 first. 

If the stock can do that, bulls could see a big rebound back to the upside. Specifically, let’s put the $145 to $150 area as our first upside target. Above that and bulls can target the declining 10-month moving average.

On the downside, bulls need to protect themselves as Alibaba stock has been in a painful downtrend.

For that, I am watching this month’s low at $115.77 as a potential stop-loss. A $14 stop-loss from the monthly-up trigger sits at $115.50. Traders who want a looser stop-loss can consider going just below the December low.

If investors are lucky, they can target about $20 a share in upside at our first target, followed by $30 to $35 a share in upside on our next target.

I would generally like a bit better of a risk/reward ratio, but Alibaba’s rotation could be potent if it takes hold, allowing us to raise our stops if and when it gets going in the right direction.