Alibaba’s application to list on the Hong Kong Stock Exchange has been approved and will be an offering of up to $15 billion worth of shares, which will be the 3rd largest listing on the exchange. Alibaba will begin a roadshow soon. The new shares will then go live November 25th.
This listing will allow Chinese investors to buy shares of Alibaba, a beloved company, for the first time. This coupled with China’s recent propensity to buy new tech listings, should be a positive for the stock.
Keep in mind, Hong Kong is going through a period of political unrest. We can see from BABA’s trading action that investors are unsure of how the IPO will affect the stock price in the United States. One scenario is there is an arbitrage situation, where the higher price on the Hong Kong exchange increases the attractiveness for our market.
We published a PDF on Alibaba in October and this PDF is still very relevant. We encourage you to read this if you are interested in this company.
Technical Analysis
By Knox Ridley
Big Picture – Alibaba’s daily chart since IPO
The above chart is the daily price action of BABA going back to its IPO in 2015. Since bottoming in in late 2015, Baba has been in a strong uptrend, which is highlighted by the blue dashed line moving up. When looking at the health of an uptrend, the RSI can tell you if it’s healthy, or fading. The green arrows indicate a healthy uptrend.
Notice the RSI oscillated above the 70 line and rebounds at the 50 line. This coupled with upward price, suggests more gains are potentially ahead.
Now, notice the RSI in late 2017. The red arrow is indicating that the RSI begins to trend down while the price keeps going up. This is the indication of an unhealthy uptrend.
Since bottoming in December 2018, Baba has recovered to an extent. Notice how the price is being squeezed by the triangle pattern, which is highlighted by the 2 blue dashed lines.
The RSI, though making higher lows, which is a great sign for building momentum, still has not breached the 70 line, which is a warning to bulls. I will want to see the RSI break through this level while price breaks through the upward triangle channel before I can confidently go in for the next leg up, while also raising my stops to protect any gains. Adversely, if the RSI breaks the upward trend, which is highlighted by the green arrow going up just below the RSI, that will be an indication the trend is breaking to the downside.
The Bull Case varies based on the state of the larger degree Wave 2 in green. It basically has us ending the Wave 2 drawdown in December 2018. That would put us already within the Wave 3 uptrend, which I have us topping out around $250 region, simply based on where we generally see 3rd Waves topping out.
The only problem that I have with this count is that the it took around 3 years for the first wave to form, and only 3 months for the second wave. This isn’t normal, but I’ve seen stranger things when analyzing the structure of a trend. So, if Baba decides to break resistance with the RSI in tow, I will happily go long with a stop just under $160.
For a buy and hold, Baba below $160 is a good target for any long only investor. Some of the Fibonacci counts have us with a retrace to at least $130.
Volume Report
The above chart is a snap shot of the daily price action of Baba going back to the beginning of the most recent bear market in China, coupled with the daily volume below the price.
Fundamentally, price is simply a battle between buyers and seller. If you think of it as a scale, if the weight of buyers increases, the price will increase, and vice versa. So, when institutions – i.e., the “smart money” – make a position, it will do so in large volume, which will move the price of the stock.
I look for two things: (1) larger than normal volume spikes, that do not coincide with earnings reports; (2) Large spikes in volume that coincide with large moves in price.
That being said, the blue lines above indicate prices at which we see institutions deciding to sell. The above chart shows four instances of heavy selling with significant price moves within this range.
Notice how difficult it has been for Baba to break out of this range to the upside and hold. I’d like to see the volume spikes shift to the green around this price level before getting more confident in the upward direction of Baba.
Conclusion:
We are long on Alibaba, and believe it is undervalued based on current prices. Our cost basis is currently below $160, so we are holding it without stops. If it breaks the $160 price zone, we will likely add more to our position for the long haul.
If you are more cautious and do not yet have a position in Baba, I’d place a stop just under $157 to protect from a larger degree drawdown. And, if you’d like to wait for more confirmation, you can wait for Baba to confirm both in RSI and in price through the triangle pattern with a much tighter stop.