When the entire U.S. stock market sold off to open 2016 on fears of an economic slowdown in China, it’s understandable that Alibaba Group Holding Ltd (NYSE: BABA) would lead the nosedive. However, after plummeting more than 25% to open the year, Alibaba has now recovered most of its losses and is now down only 2.9% in 2016.
In the process, the stock has continued forming a major long-term technical formation in its chart.
When a stock forms a series of lower highs and higher lows over a period of time, the result is a resistance line with a negative slope and a support line with a positive one. If neither trendline is broken, the two lines will eventually converge and the stock will be forced out either above or below the triangle formation. This technical breakout can be a particularly violent one and drive the stock to new long-term highs or new long-term lows.
Since making its 2015 highs at around $95, Alibaba has been forming a huge triangle formation in its chart (red and green lines). Unfortunately for traders, the triangle formation itself is neither bullish nor bearish, but traders that identify the pattern can be the first ones to spot a possible breakout.
Alibaba has been on quite a run in recent weeks, and bulls are likely anticipating an imminent bullish golden cross of the 50-day and 200-day simple moving averages. However, until the pattern changes, the triangle formation trumps the moving average crossover. Alibaba experienced a similar golden cross in late 2015, only to subsequently fail to break above the triangle resistance.
Alibaba’s surge now has it once again bumping up against the triangle resistance, so the next week or two could be critical for traders. If resistance holds, the stock could soon be headed back down to test the triangle’s lower support level, which currently sits at around $61. But if the stock breaks significantly above $79, it could be a very bullish long-term technical breakout that Alibaba bulls have been waiting for ever since the stock hit all-time highs following its highly-publicized IPO back in 2014.
Speaking of the IPO, perhaps it’s no coincidence that the stock’s $68 IPO price (blue horizontal like in the chart) rests almost right in the middle of the triangle pattern. As the market mulls which direction Alibaba will move next, it has (and likely will) continued to consolidate in an increasingly tightening oscillation centered on the $68 IPO price.
Alibaba’s triangle pattern, which is nearly a year in the making at this point, will likely be the first indicator of the stock’s next big move. A push to the upside in coming days could be a huge bullish breakout for Alibaba, but a drop to the downside means that the triangle will remain in play for the time being.
Disclosure: the author has no position in the stocks mentioned.
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