Alibaba Stock Is Set Up for a Short-Term Rally, Technical Analysis Shows

NEW YORK (TheStreet) -- Alibaba (BABA) stock is poised for a rally, technical analysis shows.

This stock has fluttered, to say it politely, since the early days of its IPO last September. 

It opened at around $86, traded to around $100, then fell to around $83 within its first month of being publicly traded. Then the price exploded, rewarding investors who had bought in at the IPO and held their positions or added to them. Shares hit $120 briefly in early November.

Since then, however, that $120 milestone has become fainter and fainter, as the stock fell into the May low, reaching the high $70s.

There are not only hopes and dreams appearing again, however, after the late May rally made it to the mid-$90s. There is also a new trading setup, which is supported by the Decision Support Engine.

BABA Chart

BABA data by YCharts

Although further downside can't be ruled out, the pattern recognition component of the DSE warns traders who have made short sales from the May reversal consider taking their 10-point profit, or at least using tight buy stops at $87. 

This is because if the stock breaks above $87, it likely will project a move toward the May peak near $95, with more bullish potential thereafter.

Depending upon the pattern and technicals at any near-term test of 95, the DSE could confirm its current intermediate-term (weeks to months) projection of a move toward $102, plus or minus $3. That is a 20% move from current levels around $86.

Specifically, the stochastic component of the DSE is crossing up from an oversold extreme on the daily bar chart. In addition, the lower Bollinger Band is acting as support, along with the 50-day moving average. 

Historically, these components lining up this way have been harbingers of a stock decline that is late in development, and about to bounce, at least temporarily, for several days to weeks. 

Any break of $80, on a closing basis, would be suboptimal for the forecast to play out, at least until after a test of the mid-$70s was allowed. In fact, Alibaba has no business being below $82, if the bulls are about to regain control. 

Therefore, covering shorts and getting long into the $85 zone, plus or minus $1, with sell stops at $82, is how the DSE suggests this opportunity might be addressed, unless the buy stop at $87 is filled first. If it is, $82 must still be the protection.

If all goes well, DSE will warn to exit longs into the $99 zone, plus or minus $1, and be all out into the $103 level.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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