Do you see this pullback in Alibaba (BABA)? Let’s look at a method that has pinpoint accuracy in spotting the turn. (August 28, 2017)
BABA
I want to look at Alibaba ( NYSE:BABA ) today. It is a couple days late, but I think Alibaba ( NYSE:BABA ) is still shortable, if only just to complete the pattern, 5-6 points maybe to get back to the 20-day moving average. Or, until the 20-day moving average rallies up to catch the price. This stock, I am just looking at this, it really kind of doesn’t move down 4 days in a row. If you look at it, it is like 3 days down, a little bit of a rally, etcetera, etcetera, all the way up. It is just a stock that you really can’t keep down.
Now, one time that is a little bit different was back here when the company last reported earnings, right? I think that was earnings. The reason I am saying that is, because I know Jack Ma had been at a conference or something, and he just gave this UNGODLY bullish outlook on the company and the stock jumped, and it settled in a little bit and it never really came back, so here we are. Pardon me for forgetting whether this was actually on earnings too; it seems like it is.
Anyway, the stock gapped up here. It got really extended; kind of like it is, if you just want to look at the 50-day moving average, the stock was up 20 percent. Here the stock went up about 25 percent above the 50-day moving average. So when it gets really extended on a STEEP move, I am not talking about a move where the stock just kind of gets a little bit higher. And then the 50-day moving average starts to move up and it is all good, I am not talking about that. I am talking about when the stock makes a big move up, then it tends to pull back more.
Here, this wasn’t a big move up, it was just the next leg higher, it just kind of drifts sideways. Here, I would say this was kind of a big move up. And you can tell that by the Bollinger Bands. You see how they were pretty narrow here. I don’t really think of bands that are on stocks that are not really trading sideways, I don’t really think of them as much of a “squeeze”, even though the dynamics are a little bit the same. Where as I will look at this where the stock has been trading sideways for a couple months, really tight Bollinger Bands, that is a real bullish move, when it comes out of here then that is a really good time to buy.
Here, when a stock busts out like this, you ride the bull for 8 seconds and then the stock pulls back. Here I think we are getting the same thing. So I think you could short Alibaba ( NYSE:BABA ) now and make a little bit more money. But after 3 days, again I will say it, I don’t see it moving up to 180.00 any time soon because it just looks tired and we are seeing volume that is increased here. The last couple of days, Friday, and then today above average volume. So we are seeing a pick up in institutional selling.
But I want to look at the hourly chart and see if we could have caught this, as far as getting out of it if you are long, caught it a little bit earlier. What I am looking at here is a 60-minute chart and we are looking at the VWAP, the volume-weighted average price, right? That is based on the volume, what is the average price of a stock trading at any given time. And so you can see here, on the way up the stock would move below the VWAP some, but then ultimately it would move back up. The VWAP is in an uptrend. And when the stock did move below it, briefly, buying took it higher. So if you are just looking at time spent above water and time spent below water, not a lot of time was spent under water here. It has all generally been moving higher.
Okay, well then something happens here on the 24th. Let’s go back and look on the daily chart and see what day the 24th was. My bet was it is that one, Thursday. So now let’s go back to the hour. Something happens on the 24th. Rather than the stock regaining, staying above water, it actually traded down, you can always do this hindsight observation and trade every chart PERFECTLY when you are looking back. Everybody’s a technician, few are traders.
Here, the VWAP was moving sideways as it had done here. It kind of did that pretty much every day. And guess why it does that every day? I will tell you why. Because most of the volume takes place in the morning. So if the stock moves higher it is going to pull the VWAP up. Then as the volume tapers off during the middle of the day, then the price movement has less and less impact on the VWAP. Because the VWAP is literally the average price of a stock based on volume. So if most of the volume happens in the morning, that is most of the influence. The rest of the time is just kind of marking time. And so you are going to see this flat lining virtually every day in any stock.
What really matters is, this transition. When a stock moves from a, “Gosh, it is back to the VWAP, it is time to buy!” To “Gosh, it is below the VWAP and I don’t want to buy!” Suddenly it is, “Gosh, it is back up to the VWAP and I want to sell!” So this actually gives you a pretty good line in the sand of what the stock is doing and whether there are sellers or buyers in a stock. Right now the VWAP, on the 60-minute chart, the VWAP is acting as resistance. So as we look at this right now, and this will come down tomorrow, unless the stock gaps up here, VWAP will come down tomorrow just as a function of the stock opening below where it is now on pretty high volume.
But right now about 169.00 is where resistance is. So let’s say you are shorting this stock right here, you are going to have a buy-stop up here. Shoot, you can even put it up above 170.00, you are risking 3 percent. So you have got more upside, as far as profit, by shorting the stock, than you do downside, as far as a loss, as long as you have a buy-stop in.
Anyway, that is how you look at the transition in a stock like Alibaba ( NYSE:BABA ). And the KEY is because I don’t want you to over apply this to every chart. The key is, that the stock is extended in the first place. That you can clearly see an uptrending VWAP, and buying on each pull back to the VWAP. We have got to see the buying on each pull back to the VWAP. If we don’t see that, and by the way, the stock price can’t go backwards, if we don’t see that then it doesn’t really matter, it is not something that we want to trade. Then once it breaks down, then we want to see SELLING at the VWAP.
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