Shares of Alibaba Group Holdings (BABA) - Get Alibaba Group Holding Ltd. Sponsored ADR Report have not participated in the broader market's four-day rally, and the divergent price action and the direction of money flow suggests further downside. There are two short-side strategies, let's take a look at the setups on the daily chart.
The daily chart shows the stock trading in a horizontal channel for the last month, with pattern resistance in the $104.50 area and support at the $100.00 level. These border lines delineated the upper shoulders and neckline of a head and shoulders pattern that marked the 2016 high and triggered the decline into the end of that year.
The rebound in the first month of this year has returned the stock to this key technical zone, but more recently as the broader market has ramped up to new all-time highs, bearish candle patterns have formed reflecting a loss of price and money flow momentum.
The relative strength index has moved out of an overbought condition and below its 21 period average, consistent with the declining positive momentum in the stock price, and the vortex indicator, which is designed to spot early shifts in trend direction, is making a bearish crossover.
On the money flow side, the accumulation/distribution line is crossing below its signal average, and in the past crossovers have signaled directional changes in the stock price. Last week an evening star pattern formed after a retest of channel resistance.
This three-day reversal formation consists of a large white or positive candle, followed by a narrow opening and closing range neutral "doji" candle, and completed by a large dark or negative candle, and it reflects a transition in trader sentiment from bullishness to bearishness. The evening star was followed by a high wick and narrow real body shooting star, another candle that failed to hold its high, and was confirmed by the negative follow-through action in Tuesday's session.
Alibaba is an aggressive short candidate at its current level, but a more conservative strategy would be to wait for a lower candle close that breaks the $100.00 support level. In either case, trail a tight disciplined buy-to-cover stop and remember that preserving capital is the primary objective.