Buy Alibaba Stock on Coronavirus Fears
Coronavirus fears are taking a toll on Chinese stocks this week. But there’s a silver lining to the carnage. Most of them, like Alibaba (NYSE:BABA) stock, had share prices that were hotter than a freshly fired pistol. They needed a pullback, and the virus news, as terrible as it is, provided the catalyst needed for Chinese equities to cool off.
Source: zhu difeng / Shutterstock.com
Now leaders in the space offer attractive buy-the-dip setups. Spectators reticent to chase last week’s lofty prices have the chance to pile in at lower-risk levels.
We’ll break down the opportunity in Alibaba stock below, but first, let’s look at the price action in the iShares China Large-Cap ETF (NYSEARCA:FXI) to provide the backdrop for our trade idea.
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China’s Stock Woes
Source: The thinkorswim® platform from TD Ameritrade
FXI is the most liquid exchange-traded fund available for diversified exposure to China’s stock market. As such, it is the go-to vehicle for traders and investors seeking access to the largest companies in the country. The spreading coronavirus crisis has taken FXI down 6.5% from last week’s $45.29 high. It’s far from a major correction, but enough to reintroduce fear into a marketplace that has been extremely complacent.
Though the descent has pushed FXI below its 20-day moving average, the 50-day is holding firm this morning. We are testing the lower boundary of its trending range in what could turn out to be a buying opportunity. Because the damage to FXI has been insufficient to turn the intermediate-term uptrend, I suggest maintaining a bullish view on China and the entire emerging markets space for that matter.
Alibaba stock is retreating alongside FXI and offers a compelling low-risk setup as well. Let’s take a closer look.
Alibaba Stock Charts
Source: The thinkorswim® platform from TD Ameritrade
Late last year, BABA finally mustered the strength to break out out of its two-year trading range. The phase-one trade deal, and improving sentiment surrounding emerging markets, boosted the stock to a new record. Momentum increased during the ascent, breathing new life into what had become a flagging trend. Volume patterns also confirmed institutions were wading back into the waters with multiple signs of accumulation.
Because of the groundswell in demand, I suspect any weakness over the coming days will prove a buying opportunity. There are too many potential floors beneath the price to bet against bulls here. I’m eyeing the next two support zones at $207 and $200.
The daily view reveals Thursday’s push below the 20-day moving average was quickly bought up. Rather than selling the down open, buyers swarmed, sending Alibaba stock toward its high of the day by closing time.
Source: The thinkorswim® platform from TD Ameritrade
The next quarterly report on Feb. 12 could inject volatility into what has otherwise been a well-behaved uptrend. That’s the one X-factor that could upset what is now a clear buy-the-dip setup.
If you’re willing to lean long into the announcement, then deploy bull put spreads.
The Trade: Sell the Feb $210/$205 bull put spread for around $1.30.
As of this writing, Tyler Craig didn’t hold a position in any of the aforementioned securities. For a free trial to the best trading community on the planet and Tyler’s current home, click here!
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