Spotlight: Alibaba Group

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Alibaba (BABA): An Overview

Founded on June 28, 1999, in Hangzhou, Zhejiang, Alibaba (BABA) is one of the world’s largest retailers and venture capital firms. It ranks second among financial services companies, behind only Visa, through its fintech division, Ant Group. The company hosts the largest B2B, C2C, and B2C marketplaces globally.

On September 19, 2014, BABA’s initial public offering (IPO) raised $25 billion, giving the company a market value of $231 billion, the largest IPO in world history at the time. Today, Alibaba is among the top 10 most valuable corporations and holds the ninth-highest global brand valuation. BABA is a powerhouse in Asia, operating a broad variety of companies worldwide.

This week, we continue our research on likely market sectors for institutional rotation by focusing on BABA. We’ll apply our top-down analytical approach, examining multiple time frames and technical theories. We’ll also consider larger influences on BABA, emerging markets, and other interesting China trades.

We’ll begin our analysis of BABA by revisiting a chart we originally shared in the May edition of “From The Trading Couch” (FTTC).

Historic Hedge Fund Inflows into China Sector

In May, we discussed the historic hedge fund inflows the China sector had experienced recently. In “From The Trading Couch” (FTTC), we explored monetary policy and its influence on sectors like emerging markets. We presented this weekly chart of iShares Emerging Markets ETF (EEM) illustrating the relationship between monetary policy and the different stages of the institutional business cycle.

When we see hedge funds doing the same thing, we investigate until we see what they see. This week we’ll review some of the results of that work.

EEM and Institutional Activity

The post-COVID markdown process undercut the previous volume shelf. Notice the climactic selling event followed by a long, range-bound accumulation process without a Wyckoff spring event—glaring indicators of institutional activity.

That’s all the leverage they needed to fully take advantage of this cycle. Take note of the steep price advance and decline all the way back down to their position level. They’re not going to take themselves out of the trade.

Hang Seng Index (HSI) Analysis

This is the weekly view of the Hang Seng Index (HSI), known as the Dow Jones of China. It tracks the 50 largest corporations that are trading on the Hong Kong stock market. It is the main indicator of the overall market performance in Hong Kong tracking the largest companies in China, Hong Kong and Asia.

HSI has formed a similar bottoming structure with a deep selling climax but a much deeper back test than EEM. We see a constructive bottoming structure forming as HSI transitions out of the post-COVID corrective period and into a new uptrend.

Secular Bottom for HSI

On the highest time frame view, HSI is putting in what could be described as a possible secular bottom, completing the second wave of its initial impulsive wave formation. Institutions have completed a full cycle, taken profits, used a markdown campaign to push prices to their target range, and re-acquired positions.

Why have China headlines dominated for two years? How often have we heard about the real estate issues in China? Meanwhile, HSI is putting in a secular low, and we’re seeing record hedge fund flows into the China sector.

Ideally, we’ll see HSI break out of the top, right corner of this (Darvish) box. This aligns well with the expected upcoming monetary policy change and weakening of the US$.

US Dollar ETF (DXY) Weakening

A quick view of our long-term chart for the US Dollar ETF (DXY) indicates continued weakening of the US$. A weaker dollar helps high beta assets, including emerging markets and China, setting up for an extensive markup campaign.

Maneuvering by Wall Street Institutions

Wall Street institutions have promoted negative sentiments while building their positions. Now, they’re ready to embark on their markup campaign and are changing their tune.

BABA and HSI Comparison

Our first look at BABA (bottom) compares the weekly chart to the Hang Seng Index (top). We find both have formed almost identical accumulation patterns all the way down to the current positive divergence. Now you see why we began our review with HSI. Both have endured extended periods beneath their 200 weekly exponential moving averages (200WEMA, blue). Long enough for the rest of the moving averages to catch up, constrict and are now in a supportive position. 

Always remember, moving averages constrict, then they expand. This is where it becomes critical to be aware of the institutional business cycle. The expansion will trend in the direction of the next stage of their cycle. Here we have an oversold condition that is completing with a supportive cluster of weekly moving averages. Very bullish. 

Before we look further into BABA, let’s take a look at a few other China charts to see if we have similar conditions.

Tencent Holdings (TCEHY) Analysis

TCEHY is one of the few companies that can be considered competitive to BABA. This weekly chart shows an almost identical accumulation pattern with the same climactic selling event followed by a year long, methodical accumulation process. TCEHY is a little further along in it cycle as it’s already retaken it’s 200WEMA (blue) and is preparing to move into Phase E. Look at the proximity of the 30 week simple moving average (30WSMA, gold) in Phase D of the graphic insert. 

This is great news for BABA. Not only do we see the same pattern formation in TCEHY, we’re seeing constructive price behavior coming out of it which is exactly what we’re looking for. 

More on TCEHY later. 

JD.com (JD) Analysis

One of the other few, legitimate, competitors is JD. This all time view of JD’s weekly chart provides us with a very clear view of the institutional business cyclet. This is an excellent example of a cycle undercutting the previous base, effectively combining them, resulting in an extensive markup period. Notice the price behavior in 2018 as it distributes and marks down below the previous 2.5 year base beginning in 2014. We covered this last week when we reviewed ARKK. This is a very powerful setup. 

Also, look at the extensions from the 200WEMA marked by arrows. Whenever we see price reaching the extremes of these extensions, we know institutions will be taking action. These extremes are used to conduct their business as retail investors have mostly given up.

A closer look at the weekly compared to BABA shows a very similar yet different chart. They’ve both completed a 3 wave markdown phase and in almost identical positions relative to their respective moving averages. This is again a good sign as these behemoths are in lock step. It would be alarming if we saw them in distinctly different situations.

BABA’s Textbook Institutional Cycle

All time monthly view for BABA demonstrates how controlled and well managed large cap stocks are. Last week we discussed the powerful 3 wave price cycle and how wave 2 cannot dip below wave 1. This invalidates the cycle and the analysis. The low from Monday, September 28, 2015 was $57.20. October 24, 2022’s low was $58.01. Assuming that holds (primary expectation), the 3 wave price cycle is still intact by .80c. 

Rarely do you find a better textbook example of the institutional business cycle than BABA. All the technical boxes check off on this time frame. It’s in late stage accumulation after completing a full cycle. The volume signature looks good. Comparables from top down analysis all showing similar late stage formations. What’s not to like?

It isn’t everyday you run across a stock with almost 10 years of trading history that is showing bullish divergence on it’s all time chart. In fact, this is the only one we’ve ever analyzed and that’s really saying something.

Comparison with Tencent Holdings (TCEHY)

This monthly side by side with TCEHY shows how closely they’ve traced each other over the past decade. Even the volume patterns are similar. TCEHY is slightly ahead of BABA in exiting the accumulation phase. It’s already reclaimed it’s moving averages and appears ready for the next leg up. BABA hasn’t made this move yet. 

It’s interesting how much lower BABA fell below it’s 200WEMA. They both lost them all but BABA had a deeper, longer period under theirs.

Current Weekly Chart for BABA

Zooming into the current weekly we see a low volume attempted sell off countered by buying volume as the supply vs. demand condition continues to settle. There is a similar climactic selling event that is tested but holds. We have seen this pattern consistently throughout our research on Asia related stocks. 

Demand > supply conditions will most likely take control producing an upthrust similar to what we’ve observed with TCEHY. We’re watching out for a ‘jump across the creek’ there potentially running into the 200WEMA around the .382 Fibonacci level. 

We would consider a long entry here trading off of the 30WSMA with a stop loss just below the low from January. This position would be a long term hold for us.

Summary

As we continue to investigate possible Wall St. institutional rotation targets, our review of BABA and the Emerging Market sector places it very high on our list. The Hang Seng Index’s possible secular low and the late-stage accumulation activities make BABA very attractive. We can see why hedge funds were pouring in earlier this year. 

This week we used our top down approach to the entire Asian sector. We reviewed an ETF, an index and two competitors displaying very similar behavior (both historically and current). 

Bullish Scenario (Primary Expectation): After completing the full cycle, BABA is ready to begin it’s new uptrend. The constricted moving averages provide the needed support to ‘jump the creek’. After converting the 200WEMA into support, BABA continues it’s markup campaign to higher targets. 

Bearish Scenario: Supply > demand conditions re-establish themselves and larger interests push for and get a new lower low. In this scenario, it’s important to note this analysis remains the same. We’ll just need to lower our Fibonacci anchors to reflect the lower low. 

We mentioned ‘more on TECHY later’ previously. Many members and followers have been interested in an update on SE. TECHY is the parent of SE so we thought it would be appropriate to fit into this week. 

Another amazing looking Asian sector chart with an institutional base, 3 wave price cycle formation and late stage accumulation. Those of you that have been studying up on Wyckoff may notice this is late stage Phase D. This high, tight flag formation is one of those ‘sign posts’ we’ve referred to as demand has taken full control at this point. Most likely moving on to Phase E. This was our favorite chart we researched this week. 

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