Shares of Alibaba (BABA) - Get Alibaba Group Holding Ltd. Report are trading below two critical technical support areas after plunging almost 9% Wednesday to a session low of $74.12. The Chinese e-commerce company disclosed it is being investigated by the Securities and Exchange Commission to determine whether its accounting practices violated federal laws.
Need other reasons to take profits in BABA?
The stock closed Wednesday at $75.59, down 6.8% from its prior close of $81.12. Since last week, Alibaba has not only erased its year-to-date gains but the stock is now in negative territory on the year, down 7%.
More important, Alibaba's stock has fallen below both the 20-day and 50-day moving averages of around $78 per share. A decline to around $73 and possibly lower remains in the cards. Take a look at the chart below, courtesy of TradingView.
As of Wednesday's close, BABA is only 2.7% above its 100-day average of $73.56 (yellow line). Although the stock on Wednesday bounced off its near-term support at $74.80 (bottom blue line) to close higher, that mark will be tested again multiple times in the next few days as the market digests the SEC's probe.
If the stock can't hold $74.80 then its 100-day average at around $73 likely won't either. This means the stock now has a greater chance of falling to $70, or 7% lower, than retesting resistance at around $81, or 7% higher.
In short, Alibaba's technical advantages have begun to fail at a time when the SEC is looking into its fundamental metrics to make sure it hasn't violated any rules. As such, the stock will remain under pressure. So there are now likely more net sellers than there are buyers.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.