Alibaba Group Holding, Ltd (NYSE:BABA) was trading over 4% lower on Friday, after gapping down slightly to start the trading day.
On Thursday, Alibaba confirmed it was trading in a new downtrend by printing a lower low under the May 2 low-of-day at the $95.15 mark. Friday’s bearish pressure is likely a continuation of the trend.
A downtrend occurs when a stock consistently makes a series of lower lows and lower highs on the chart. The lower lows indicate the bears are in control while the intermittent lower highs indicate consolidation periods.
Traders can use moving averages to help identify an uptrend with descending lower timeframe moving averages (such as the eight-day or 21-day exponential moving averages) indicating the stock is in a steep shorter-term downtrend and descending longer-term moving averages (such as the 200-day simple moving average) indicating a long-term downtrend.
A stock often signals when the lower low is in by printing a reversal candlestick such as a doji, bullish engulfing or hammer candlestick. Likewise, the lower high could be signaled when a doji, gravestone or dragonfly candlestick is printed. Moreover, the lower lows and lower highs often take place at resistance and support levels.
In a downtrend the "trend is your friend" until it’s not and in a downtrend, there are ways for both bullish and bearish traders to participate in the stock:
- Bearish traders who are already holding a position in a stock can feel confident the downtrend will continue unless the stock makes a higher high. Traders looking to take a position in a stock trading in a downtrend can usually find the safest entry on the lower high.
- Bullish traders can enter the trade on the lower low and exit on the lower high. These traders can also enter when the downtrend breaks and the stock makes a higher high indicating a reversal into an uptrend may be in the cards.
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The Alibaba Chart: If Alibaba is able to close the trading day above the $90.50 level, the stock will print a hammer candlestick on the daily chart, which could indicate a bounce up to at least print another consecutive lower high is in the cards for Monday. If the stock closes the trading day near its low-of-day price, it will print a bearish kicker candlestick, which could indicate another gap down is in the cards.
- The move lower on Friday came on lower-than-average volume, which indicates fear selling hasn’t yet gripped the stock. As of press time, only about 13.5 million shares had exchanged hands compared to the 10-day average of 22.67 million.
- Alibaba has multiple gaps on its chart, with the first 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 makes it likely Alibaba will trade into both empty ranges in the future.
- Alibaba has resistance above at $96.17 and $104.44 and support below at $89.95 and $83.84.
See Also: Why Alibaba Shares Are Diving
