Wondering whether to buy or sell Alibaba (BABA)? Here’s your trade. (July 18, 2016)
BABA
I want to look at Alibaba ( NYSE:BABA ) in this video, because I think the stock is in a good position to move higher into earnings, which are due 22 days from now. You can see how this stock has been trading in a sideways range. You’ve got resistance right overhead here. By the way, here’s something, this is an ascending triangle, a flat triangle. A common technical analysis, I’ll say it, mistake. You spot this pattern and you think, “Well this is a bullish thing, because stocks will break out.” So you spot this pattern, and you think you are entitled to make money because, “Oh, I see this flat triangle. This is bullish, particularly after this move higher. I’m going to buy this stock at $85.00. Oh, it’s breaking out.” The next thing you know it’s down below 60.00 and you’re wondering what happened.
What happened was, you didn’t think about the fact that spotting patterns don’t entitle you to profits. They just give you some insight into the relative emotions and financial commitments of traders that are long and short and none of the above. So keep that in mind. A broken pattern like here, a fall down, or out of this flat triangle, that gives you more information than a completed pattern, because everybody sees that. So why am I bringing this up? Well now we’ve got a different deal. We’ve got this channeling stock that’s been trading sideways for the last few months here, right? So it’s just starting to push out to the upside. Suddenly we’re looking at, oh that’s right, a double bottom, in fact I think I pointed that out previous, but if I haven’t, I’m doing that now. Double bottom, this is a stock that’s moving higher. Okay, fine, breaking out of this channel, I want to be long this stock and I think that’s the trade.
I think the trade is to be long the stock. Keep a stop back into the higher part of the channel, not right up at the top because you get a little correction one day and you’re stopped out and then the stock takes off. But you kind of keep a stop right in here around 80ish, 79.85, lets say that. You put a stop there and then the only way you’re stopped out of is if this is a pattern kind of like this, where you think it’s going to zig and instead it zags. So you think this stock is moving higher. You buy the stock, you put a stop in the upper half of the channel. Then the only way you are taken out of the trade is if your initial premiss, which is. “I think the stock is moving out of a channel and moving up into earnings and so I’m going to buy the stock.” That’s your premiss, you’re out. If you’re wrong, which is when you want to be out the stock, you don’t want to leave it for your emotions to get involved. Just put your stop a little bit below $80.00, buy the stock. And then what’s it going to do, how is it going to react when they report earnings in a few weeks? We’ll figure that out when the time comes. But for now this is a buy based on the aforementioned reasons, with a stop in the aforementioned level.
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