Trade Set-Up: BABA

I was looking at the charts of BABA today for a member and normally I'd expect about 2/3rd of the market to move directionally with the broad market averages. The market averages are the most influential force on any given stock, although the details and relative performance can vary.

I'll show you what I like about BABA for a short term trade, likely options to make up for the shorter term nature. Also where/when and why I'd consider BABA a trade. I did consider it for a long equity position here and now, but given the overall picture in the market, I have to demand a higher standard and if the trade comes to us, then we have that, if it doesn't, nothing lost.

However this is my standard, you may see something additional that you like here. One other option I considered was a partial (1/2 size) long equity position and then "If" the trade set-up described below fell in to place, I'd either add the second half or open a call (option) long position.

 This is a 5 min chart of ES. I  see two negative divergences in the same area suggesting resistance. I also suspect this is short term resistance and in the context of the forecast bounce, it will likely be broken to the upside, but remember this morning's intraday weakness in breadth which just so happens to be occurring near resistance which is why I decided not to open the BABA trade right now, but rather wait.

When you see the VXX/VIX post, I think you'll gain a greater appreciation for the risk in the market on this bounce and you'll see that it's more than just "local" resistance here (above).

 This is the daily chart of BABA. If you look to the far left you'll see a Channel Buster with increased upside ROC in price that breaks above the channel; a "seemingly" bullish event, however this is often a red flag that the trend is about to change as it did with a break under the channel very shortly after as is the case most of the time with this version of a head fake move.

Since there has been a large flat area. I'm not going in to whether I think this is a base, I don't see good evidence for it and it would be counter to the market. While there will always be stocks that run against the market, the probabilities just aren't on your side.

 However locally the last 2-days something more in line with the near term market expectations has turned up, a 'w' base pretty much at $80.10 with increased volume on bullish m=hammer reversal candles at both lows.

The near term market resistance above represented by the 5 min ES chart is interesting because a head fake move would be the highest probability if BABA were going to bounce off this small base which is also about in line with market expectations for the current bounce since Friday. Being the whole number of $80 is just below a known area of support, it would be likely that any BABA longs would place stops at the psychological magnet of a whole number like $80.

The BABA 15 min chart has a similar divergence as the broad market averages ...

And on this more detailed 2 min chart we see the second low with more strength than the first suggesting continues accumulation, in line with the type of bounce we expected/expect in the market.

Using the same 2 min chart, I'll be setting price alerts for a move in BABA BELOW $80 and if they trigger, I'll check the charts and see if we have increased volume (stops being hit) and a stronger 3C positive divergence telling us those stops were accumulated on what would be a small head fake move which as we have discussed at length, is one of the best price-based timing indications for a reversal or in this case a bounce.

So I'm looking for the break below $80, volume on the move and a stronger 3C chart. Call premiums should drop, but I don't want to wait too long as BABA has earnings coming up at the end of the week and the premiums will likely start to rise.