Alibaba returns to crime scene | chart of art

Chinese stocks tumbled from mid-April to mid-May, with the China Large Cap ETF (FXI) up about 40% and surpassing its 200-day SMA. FXI has been on a downward trend over the past few weeks. These surges and declines have created potential opportunities as some stocks have returned to breakout territory. These so-called pullbacks give traders a second opportunity to participate in the breakout. Today’s example shows Alibaba (BABA), which was featured on ChartTrader last week.

The chart below shows Alibaba’s 200-day SMA (red line) and a composite of the trends in the indicator window. On the price chart, BABA twice found support in the 67-68 area and broke through resistance with a surge in May. The two lows in this area formed a double bottom, which was broken and the downtrend was reversed. Also note that BABA broke its 200-day SMA.

Traders who failed to catch the breakout will have a second chance, as BABA returned to the breakout zone in early June. This is a classic “pullback” to broken resistance, which turns into support. The stock also returned to its 200-day SMA, and the decline gave back about 61.8% of its previous surge. This retracement is normal for a decline within a larger uptrend. Overall, there is a support-reversal zone in the upper 70s and a short-term resistance line in the 80s. A breakout here would likely reverse the short-term downtrend and resume a larger uptrend.

As mentioned above, the indicator window displays a trend composite that aggregates signals from five trend-following indicators. It moved to +1 in early May, meaning 3 out of 5 indicators triggered bullish signals (3 – 2 = +1). By the end of May, two additional indicators had turned bullish and all five indicators are now bullish (+5). My strategy is to find tradable downsides within a larger uptrend. The Trend Composite Index indicates a long-term upward trend, and a decline into the low 70s is a tradable downtrend. This indicator is part of the TIP Indicator Edge plugin for StockCharts ACP (click here).

TrendInvestorPro’s ChartTrader featured BABA and two other Chinese names last week. Recent breakouts in several cryptocurrency-related names have also emerged, as they signaled the continuation of larger uptrends (IBIT, COIN, BLOK). Reports and videos are published twice a week. Click here for more information.

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