At the beginning of the month I began to notice that BABA spent most of its time between $87 and $90. That was comforting since I think BABA will be a good investment. But I am the guy who always reminds my readers to, "Trade What You See... Not What You Think, or Feel, or Hope, or...". So in order to follow my own guidelines, I had to begin to evaluate the "risk" as BABA dropped below that $87 area. If you read my note on the graph you will see my rationale.
This is a DAILY chart of Alibaba
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| Click for a larger chart of BABA |
The gist of my thought process is that BABA came public at $68 (IPO price) and jumped into the $90's on the first day. When it didn't continue higher I figured consolidation is better than going down. But as it trended lower I needed justification to stay positive. My justification is typically technical analysis of some sort. And notice I said, "stay positive" and not stay long. I do my best not to be long a stock that is trending lower on the daily.
In this instance I looked to Fibonacci Retracement as my justification. I couldn't draw the Fib lines on the chart because BABA never actually traded at $68. So after some simple mathematics I realized that the 38.2% retracement line was between $83 & $84. A stock that bounces off the 38.2% retracement is typically a strong stock. So stay positive as long as it bounces around $83.
You can also notice the red downtrend line on the graph from 10/9 to 10/15. On 10/15 BABA's daily candle closed above the red downtrend line. That is one sign that it may be time to "go long". The next sign was when BABA's price crossed above the daily high from 10/15.
If you did buy on 10/16, how could you have protected yourself from a false breakout? You could have used the 10/16 low of about $84. Anyone who did this is still in the stock today.
So what now? Do you buy in here? Wait for a dip? Buy puts or short (it's the title of another one of my posts) because "it has to come down"? Some people actually trade like that...
Take a look at an hourly chart of BABA. The price has been above the 21 hour ema since 10/16. Much of that time the price has actually been above the 8 hour ema. If you want to buy in here, I would do it on a bounce off the 8 or 21 hour ema. If you want to wait for a dip, I'd say look for a dip to a horizontal line where resistance became support. And if you want to buy puts or short, you should wait for a break below the uptrend line that started back on 10/15. Your target could be the $85ish area.
Whatever your decision, good luck to you! Decide what you see in the chart and invest accordingly. Use a stop loss so you don't loose too much money if you are wrong. No one is perfect. If you get out of an investment because you made a mistake, you can always come back and try again another time. But if you don't get out of the investment you may not have any money left to try again.
Trade What You See... Not What You Think, or Feel, or Hope, or...
The Trend Is Your Friend... Until Its Not
Limit Risk & Protect Profits
