Stock of the week - Alibaba (14.10.2021)

Chinese stocks traded under heavy downward pressure since the beginning of the year. Chinese authorities target a range of industries and sectors with tougher regulation as well as increased crackdown on companies with dominant market positions. Alibaba Group (BABA.US) dropped over 40% during the first nine months of 2021. However, the stock started to recover at the beginning of October and has already gained 20%. Let's take a closer look at recent news related to the company!

Shares recover

Alibaba as well as numerous other Chinese companies have been underperforming in recent months. Broad crackdown in China that targeted a range of sectors and industries is a reason to blame. The Chinese antitrust regulator launched an investigation into Alibaba's e-commerce business in December 2020 and the stock has erased half of its valuation over the next ten months. However, shares started to recover in October and have already moved over 20% higher off a recent local low. Some media reason this with Meituan situation. Meituan, a massive Chinese shopping platform, was fined over $500 million for abusing its market position. While the fine is enormous, it gives hope that fines may ultimately be the only action taken by Chinese authorities' actions.

Charlie Munger boosts stake

However, there is also another explanation for the sentiment towards the company improving recently. It was revealed at the beginning of October that Daily Journal Corporation led by Charlie Munger, a long-time business partner of Warren Buffet and Vice Chairman of Berkshire Hathaway, significantly increased its stake in Alibaba. Daily Journal's stake in Alibaba almost doubled since July, to over 300 thousand shares. While the whole stake is quite small and valued at less than $50 million, the fact that a famous investor saw an opportunity in the company boosted investors' confidence.

There was also an increase in mentions of Alibaba Group on the WallStreetBets Reddit forum. Companies that drew the attention of Reddit's investors community often saw their share price rise significantly.

Downtrend structure still in place

While recent gains were steep, traders should remember that they followed a long period of declines. In spite of a 20% rally, Alibaba shares have not painted a higher local high yet, meaning that downtrend structure is still intact. Most recent local high is located slightly below the 23.6% retracement of the almost a year-long downward move ($181 area). A 100-period EMA (D1 interval, blue line) can be found slightly above this area. Note that it has halted upward moves twice earlier this year (yellow circles). Should we see a break above, the next major resistance zone ranges between 38.2% retracement and the upper limit of the Overbalance structure ($201-207 area). According to Overbalance methodology, a break above this area would hint at a trend reversal. Nevertheless, stock would need to rally another 20% to reach this zone.

Source: xStation5