Alibaba: Short-Term Trading Strategy (NYSE:BABA) – Seeking Alpha

Crazy Cow

The author recently observed two bulls: a young bull with an older, wiser looking over his shoulder in a disapproving fashion.

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The Young Bull and the Older, Wiser Bull

Recently, I observed an old bull and a young bull grazing in a green pasture on a beautiful, sunny day. The young bull gazed towards a nearby watering hole and noticed a herd of cows had gathered there. The youngster said, “I’m going to run over and buy one of those cows a drink”. The older, wiser bull replied, “I’m going to walk over and buy them all a drink”.

Alibaba: A Proverbial Herd of Cows

Over the last year, Alibaba (NYSE:BABA) has traded between a high of $182.09 and a low of $73.28. BABA has generally trended down with exceptional volatility and closed on September 2nd at $91.80.

BABA: 1-Year Price Range

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Many portfolios, no doubt, include “dead money” in losing BABA positions with negative unrealized and realized gains. However, each time a share changed hands at every price level, there was a winner and a loser on the trade. Clever or lucky investors sold at a short-term peak to a willing buyer; the opposite case is also true. Over most time ranges, it may be possible to get on the winning side of most trades and generate return even on dead money.

Short-Term Trading Strategy: Maintain Share Count

Over the last five days, BABA’s price range has been $90.78 to $100.88/share. Over the same 5 days, BABA has traded at several shorter-term highs and lows. Based on the recent past and the last year, one could reasonably expect BABA to continue bouncing in a similar way. With the goal of maintaining share count while realizing short-term gains, I recommend a short-term buying and selling strategy based on a relatively simple analysis.

BABA: 5-Day Price with Buy & Sell Ranges – Maintain Share Count

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BABA‘s 5-day price range is represented by the solid blue line with a median price of $95.83 plotted by the blue dashed line. The green and red shaded areas represent short-term buy and sell zones by the author. The sell and buy ranges begin at 0.75% above and below the median price respectively. The 0.75% spread on each side of the median price range is somewhat arbitrary. It could be narrower or broader depending on several factors including one’s risk tolerance, how closely one will follow BABA intraday, and one’s planned trading frequency & volume. Based on my analysis of recent trading, I recommend buying BABA beginning at $95.11 and selling beginning at $96.55 in order to realize short-term gains while maintaining share count.

Buy & Sell BABA While Maintaining Share Count

This chart was generated with a downloadable Excel spreadsheet by the author.

Maintain Share Count

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Author

Adjustable inputs are in the shaded cells. Buy and sell limit orders are tabulated with a goal of maintaining share count; buy & sell count and spread are equal. I recommend investors who are comfortable with short-term trading place descending buy and ascending sell limit orders on both sides of the short-term median price. Less aggressive investors can place a single limit order or a single buy and sell pair.

However, based on a brief review of BABA valuation and momentum, some investors may wish to accumulate BABA.

BABA: A Brief Review of Valuation and Momentum

BABA: Historical EV/EBITDA Ratio

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BABA EV/EBITDA is plotted over 3 years and is currently near its lowest point over that time range. The ratio reached a peak in late 2020 (arguably based on positive sentiment and hopeful analysis) and has since fallen on delisting concerns and negative sentiment. I expect delisting concerns to be resolved and sentiment to improve. Based on BABA‘s current EV/EBITDA ratio, now is a good time to accumulate shares.

BABA: Momentum

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BABA share price is currently below its 200, 100, 50, and even 10-day simple moving averages. A simple momentum strategy is based on reversion to mean; over most time ranges, share price will oscillate around its mean value. If BABA oscillates towards any of its moving averages, share price will increase.

Short-Term Trading Strategy: Accumulate Shares

Based on a brief review of BABA valuation and momentum, I recommend investors accumulate BABA. The following graph is nearly identical to the graph discussed above; a single parameter has been adjusted.

BABA: 5-Day Price with Buy & Sell Ranges: Accumulate Shares

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Again, BABA’s 5-day price range is represented by the solid blue line with a median price of $95.83 plotted by the blue dashed line. However, the green and red shaded areas representing short-term buy and sell zones are asymmetric with relation to the median price. The sell range begins at 0.75% above the median price while the buy range begins 0.5% below the median price. Short-term trading with these ranges would be more likely to result in accumulation of shares than the “Maintain Share Count” strategy discussed previously.

Buy & Sell BABA While Accumulating Shares

This chart is very similar to that discussed with relation to the “Maintain Share Count” strategy and was generated with the same downloadable Excel spreadsheet.

Accumulate Shares

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Author

The only difference is the buy spread has been reduced to 0.50% from 0.75%. The recommended sell orders are identical while the recommended buy orders are slightly more aggressive. In essence, the recommended sell and buy orders would be more likely to result in accumulating shares than those listed in “Buy & Sell BABA While Maintaining Share Count” chart.

Short-Term Trading and Wash Sales

Any buyer or seller of any security including BABA should be aware of IRS rules on wash sales and seek the advice of a licensed accountant or other licensed professional as necessary. A good Seeking Alpha article on wash sale rules is also available. Generally, IRS wash rules apply to the sale and purchase of an identical stock within a 30-day period and are most often applied to tax loss sales.

Another scenario can be beneficial to investors. If a losing position or fraction thereof is sold and then repurchased at a lesser cost, a wash sale occurs. Most brokerages will adjust the cost basis of the position. It is easiest to discuss with an example and I happen to hold a losing BABA position.

My BABA cost basis is approximately $115. I swing trade losing positions aggressively and have shared my strategy in comments on BABA articles on two occasions. On August 26th, I sold my entire position in 10 blocks with ascending limit orders starting at $98.5 with intervals of $0.5 (98.5, 99, 99.5, …$103) for an average sale price of $100.75. I placed descending limit orders later in the day to buy the same blocks starting at $98 and descending by $0.5. Two of those limit orders closed that day at $98 and $97.5 and subsequently, I was able to refill the remainder of my position with a total average price of $95.75. Notably, I realized neither the highest possible sale price nor the lowest possible purchase price over the period but still gained $5.00 per share. My cost basis was lowered from about $115 to about $110/share.

Risks: Plan to Win but Be Prepared to Fail

A thorough fundamental analysis of BABA or discussion of news is beyond the scope of this discussion; there is no shortage of analysis and news elsewhere. If one is going to buy or sell any stock, including short-term, evaluation should be carefully considered.

Further, the recommended buying and selling ranges may not be advantageous over any period if BABA makes a big move in either direction. I recommend traders generate a similar buy/sell plot either with Seeking Alpha’s advanced charting tool or by printing and annotating a chart by hand.

Short-term trading can go wrong in at least two ways. An investor can sell a fraction of a position or an entire position at the beginning of a sustained rally. That investor might not have an opportunity to repurchase those shares at a lesser price if the stock continues to rally. Conversely, one can purchase an unlimited quantity of shares on a dip and never be able to sell those shares for a gain.

An individual investor can manage these risks several ways. Complimentary but opposite limit orders can be placed as transactions close. Some brokerages have special order types whereby a secondary order is placed after a primary order executes. Further, an investor can limit how much of a position is sold or stop buying a dip once a position limit is reached. Both selling and accumulation can be limited by adjusting the frequency, size, and spread of the trades.

An aggressive investor can sell up to 100% of any position at any moment or accumulate limited only by available funds. I recommend blocks no bigger than 10% of target position size with accumulation up to 1.5x target position and selling down to 50% of the same target. In many cases where a stock is volatile, placing ascending and/or descending limit orders can be a successful strategy. More conservative investors can buy and sell in blocks of 5% or less while limiting accumulation to 120% of a target position and selling down to 80% of the same target.

Investor Takeaways

Based on current valuation and momentum, I would not recommend decreasing a BABA position at this time. BABA positions are not dead money; I advise most investors trade BABA short-term with the goal of generating return while accumulating shares. I recommend most investors buy BABA below $95.35 and sell above $96.55 if trading remains in a range similar to the last five days. Notably, Baba closed at $91.80 on Friday and may open below $95.35 on Tuesday.

I recommend investors do their own scribbling over a price chart digitally or otherwise and then tabulate limit orders. The downloadable Excel spreadsheet will generate buy and sell limit orders based on share count, high & low prices over any time range, sell count & spread, and buy count & spread. Investors who already hold a larger BABA position than fits their own risk reward profile may be eager to reduce exposure. These Investors can also generate a buy & sell zone chart and tabulate limit orders with the same Excel spreadsheet.

I advise all investors remember the two bulls I recently observed: be the older wiser, bull; have a carefully considered plan; be methodical & patient; and walk. Don’t run. Investors who patiently execute carefully considered plans are often lucky.

In the moment of action, remember the value of silence and order – Phormio of Athens

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