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Is It Time to Buy a Dinged Alibaba?

It doesn't look like a good idea at present based on the Chinese e-commerce giant's technical signals.
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Over the holidays I received just one question that was unrelated to bitcoin. The question dealt with Alibaba Group Holding (BABA) , which came crashing down to earth on Christmas Eve. Alibaba fell on news that China's government had opened an antitrust case against the e-commerce giant. 

Alibaba had been a stellar performer until then. In the two years from Nov. 1, 2018, through Nov. 1, 2020, the stock gained 215%. 

About two months ago, the stock began to decline. Then, on Dec. 24, when news of the antitrust case hit the newswires, Alibaba lost 13.3% in one session. The stock is down 27% since the start of November. 

I realize how tempting Alibaba may seem to some investors right now, but we need to remember that the company isn't dealing with U.S. regulators. 

For example, Alphabet (GOOGL) , parent company of Google, has been the target of numerous U.S. antitrust lawsuits for years. The company currently faces an antitrust suit that involves at least 38 state attorneys general. 

As I write this piece, Alphabet is less than 5% from its all-time high, a seeming indication that the company will escape this latest round of antitrust suits unscathed. Alibaba's situation is very different from that of Alphabet. 

Jack Ma's company can't play the same legal games as Alphabet. Statements about the suit from Alibaba CEO Daniel Zhang Yong have been conciliatory, almost to the point of subservience. "We firmly believe that regulated development is the future, and only with self-discipline can an industry prosper," Zhang said. 

Translation: In order to survive, Alibaba will bear whatever penalty is imposed upon it. 

Does that mean it's time to buy the stock? Let's go to the chart to find out. 

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Alibaba Group Holding (BABA) Source: TradeStation

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There were technical clues that Alibaba was headed for trouble going all the way back to August. That's when the stock began to form a bearish head-and-shoulders pattern (L-H-R) that culminated with last week's precipitous drop. 

Alibaba finally found support near $211 (red line), which coincides with the stock's late June low (arrow). Will that level hold, creating an entry point for Alibaba bulls?

According to the chart, that support level will probably break. That's because it's a short-term level that was created during a period of below-average volume (shaded yellow). 

Also, that massive head-and-shoulders pattern projects the stock to the $200 area. The breakdown from that pattern occurred on massive volume of more than 141 million shares. That's the highest turnover for Alibaba since its initial public offering on Sept. 18, 2014. 

Bottom line: It's too early to buy Alibaba. If you're determined to own this stock, be patient and you'll probably get a chance to buy it at $200 or below. 

At the time of publication, Ponsi had no positions in the stocks mentioned.