BABA Trade Set-Up

This week has been one clean set up for a BABA trade, however what type of trade depended on how BABA's price action played out.

Monday November 10th of this week our first post on this new BABA possible trade was posted, Alibaba (BABA)

I'd encourage you to go back and read all 3 posts which I'll link to,  not only if you're interested in the BABA trade, but for the concepts that are strong, proven and can be used with any kind of trading on any time frame and in any asset, more tools for your kit.

The gist of Alibaba (BABA) was that BABA made a "seemingly bullish upward acceleration from it's 60 min 30-bar moving average which has defined the recent uptrend and more importantly broke through the top of the up channel it had been in. Note I said "seemingly bullish" upward acceleration, that's because this is almost always a red flag or warning that the trend is about to change. Note that a trend change doesn't always mean from up to down or vice versa, there's a 3rd trend which is lateral or a range, however in this case a Channel Buster usually makes a sharp move lower to the bottom of the channel and often below it. I also said that we could check out BABA's health which has been stellar, on a pullback and see if it is worth a long play in a pullback as well as being a possible swing short on the pullback trade itself and if it's not healthy, then we can start to look at a larger , longer term topping set up.

Tuesday I followed up as the day after our first post (above) calling for a pullback, BABA saw the second biggest decline in its history, the pullback had started. That post of Tuesday November 11th is here, BABA Follow Up and the gist of this post was that the alerts set for a pullback had triggered and the next thing I'd like to see is BABA turn lateral in a range for  several days so we can identify whether BABA is likely to be a good swing short on a pullback move and what the probable targets where. I said if the 60 min 30 bar moving average was broken, then price should drop down to the 60 min 50-bar moving average,  which has come to pass since then.

Wednesday November 12th I posted another BABA Follow Up which reviewed what we had covered so far,  it showed the 30-bar support, it showed the range we hoped to see develop forming, it put higher probabilities on BABA behaving like a typical Channel Buster and making a sharper, deeper correction to either the lower support trendline of the channel or as so often happens, a break below that trendline with a pullback under the channel before BABA has a chance to right itself. The post also updated the Trend Channel Stop and the 3C charts which strongly suggested the next day (Thursday) would see lower prices which it did, down -2.84%.

Now we are pretty near decision time. I believe that BABA still offers an excellent pullback trade, this is one of my favorite because price comes to us at a discount as well as with good timing and it has to prove itself on the decline via 3C positive divergences to show there's still institutional interest in being long BABA, if that's not there, we don't take the trade, it's a real "Prove it to me trade" as well as letting the trade come to you rather than chasing it. Of course there's also the higher probability deep pullback swing short to consider also.

At this time I suspect a typical Channel Buster pullback is probable, but as I often remind myself, a probability is not the same thing as a high probability, low risk trade set up so we'll take a look and see what the trade set up for the swing short would be from here and you can decide how to use the information.

Updated charts...

 BABA has officially broken the wider Trend Channel (60 min with the standard deviation adjusted by changing the "Width" setting from 10 to 20). The break of the Trend Channel (blue) which has held the entire uptrend came yesterday with the stop at $115.45 and the close at $114.84. I prefer to stop out on the Trend Channel on the closing price or break of the channel rather than intraday unless using a shorter channel like 15 minutes. This increases the probabilities of a deeper pullback as the Trend Channel is constructed to allow enough room for a normal consolidation in the trend without stopping out.

 Our 60 min X-Over Screen is VERY close to a stop out as well. It too has held the entire trend up with only 1 waiver at the orange arrow, but this is why we use 3 indicators, to avoid price moving average whipsaws or false signals, the other two indicators stayed long. However price has crossed, the middle window custom indicator (yellow) is crossing as I type and RSI at the bottom has criossed since loading this chart. Again, this suggests a deeper pullback.

The yellow 60 min 30 bar moving average used to define the trend was broken as expected with the next move to be to the blue 50-bar moving average which happened this morning as expected, price is stuck at that moving average right now which is not uncommon.

However most importantly as a concept and for a swing short trade on a pullback, the "seemingly" bullish higher upside Rate of Change (ROC) was indeed a warning signal just as we posted Monday before any pullback had started, a warning that the trend was about to change and at minimum it has changed to lateral. However with Channel Busters, the momentum and the failed breakout typically sends price to the lower trendline and more often than not, below it , especially once price moves back in to the channel as it has this morning.

 The longer 30 min 3C chart is still strong as I said on Monday, but since Monday it has put in a small negative divegrence that is along the lines of a pullback.


 The 10 min chart we saw Monday suggesting a pullback remains negative and price has ranged laterally as we hoped to see.

During that time the 3 min chart has led negative to the downside even more, suggesting a higher probability of a deeper pullback. You can see Monday the 10th highlighted when we first suggested a pullback as the trend looked stronger than ever, but as always, price is deceiving.

 The intraday chart shows a pullback/negative divegrence and is pretty much in line today which would be typical of an options expiration max pain pin. As already mentioned, a move to the downside is highest probability with a move below the channel becoming high probability, however that's still not the same as a high probability/LOW RISK entry/trade.

Here's what I'd like to see, although you can use the information however you see git, some of you may see some option strategies that look good, some may want to take the trade with a stop above the recent range, this is what would draw me in...

I'd like to see BABA make a head fake move above the recent range that developed this week as the pullback started Tuesday. I'd like to see a move above the recent range (yellow arrow) which reduces risk and gives a better entry price and then set a stop above that day's intraday highs and look for the move below the channel (red arrow) to the target area of the yellow box, depending on whether we get such an upside head fake move and how strong it is, I may use Put options too increase the risk:reward ratio, if premiums on puts are not significantly reduced by such a move, I'd just short BABA with the same stop, I figure there's at least 15 to 20 points under a scenario like this and often the moves below the channel can be quite extreme before correcting themselves so a move to the psychological magnet of $100 would not be out of the question at all, with approximately a 20 point move for a swing trade and more for an options trade.

I'll be setting price alerts.

If you are more conservative, you might wait for a pullback and see what BABA looks like on the pullback, it may make for an excellent long entry or it may tell us something different about BABA's health leading to a different trade.