Alibaba Group Holdings, Inc (NYSE:BABA) gapped down over 4% to start Monday’s trading session but bounced up to close the gap intraday and was trading mostly flat by early afternoon.
The reversal to the upside may have been due to Alibaba finding support at the bottom descending trendline of a falling channel pattern. The pattern is bearish for the short term but can be bullish down the road.
- For bearish traders, the "trend is your friend" (until it's not) and the stock is likely to continue downwards. Aggressive traders may decide to short the stock at the upper trendline and exit the trade at the lower trendline.
- Bullish traders will want to watch for a break up from the upper descending trendline, on high volume, for an entry. When a stock breaks up from a descending channel, it's a powerful reversal signal and indicates a rally is likely in the cards.
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The Alibaba Chart: Within the falling channel, Alibaba’s most recent lower high in the downtrend was printed on Friday at $90.68 and the most recent confirmed lower low was formed at the $85.40 level the day prior. Monday’s low-of-day price may serve as the next lower low within the pattern, but Tuesday’s candlestick will need to print for confirmation.
- A further bounce, at least to the upper descending trendline of the channel, is likely because Alibaba’s relative strength index (RSI) is measuring in at about 31%. When a stock’s RSI reaches or falls below the 30% level it becomes oversold, which can be a buy signal for technical traders.
- Alibaba has multiple gaps on its chart, with the closest lower gap between $80.14 and $81.80 and the closest higher gap between the $148.50 and $161.14 range. Gaps on charts fill about 90% of the time, which indicates Alibaba is likely to trade into both empty ranges in the future. Bulls may prefer that Alibaba falls down to close the lower gap before a larger reversal to the upside.
- Alibaba has resistance above at $89.95 and $96.17 and support below at $73.28 and $68.70.
See Also: Video Game Streamer HUYA Follows Alibaba In Scaling Back Post Regulatory Crackdown
