Alibaba's Results May Push The Shares Lower

Aug. 19, 2020 1:34 PM ETAlibaba Group Holding Limited (BABA)99 Comments

Summary

  • Alibaba will report results tomorrow morning.
  • Options betting ahead of results suggests the stocks declines in the weeks ahead.
  • It means the company may underwhelm investors with its results.
  • Looking for a helping hand in the market? Members of Reading The Markets get exclusive ideas and guidance to navigate any climate. Get started today »

Alibaba (NYSE:BABA) will report results on August 20 before the start of trading, and at least someone is betting that the stock falls in the weeks following those results. The shares have been on an unbelievable run over the past few weeks, and a pullback in the stock certainly seems possible.

The technical chart does suggest there may be some weakness on the horizon as momentum has potentially shifted. It could even lead to the stock falling by as much as 10%. You can now track all of my stories on SA on this Google Spreadsheet.

Results Before the Open

The company is expected to report that fiscal first quarter 2021 revenue rose by 28.5% to 147.7 billion CNY, while earnings are expected to have climbed by 9.8% to 13.78 billion CNY. The company has a strong history of beating analysts' expectations. Since June 2017, the company has only missed analysts' revenue and earnings estimates two times.

(Refinitiv - Earnings Per Share Beats/Misses)

The betting in Alibaba would seem to suggest that someone thinks that Alibaba is about to drop in the weeks ahead. On August 19, the open interest for the $255 puts and calls rose by roughly 6,300 and 5,000 contracts, respectively. The data shows that the puts were bought for roughly $10.62 per contract, while the calls were sold for $14.62 per contract. As a result, the trader took in a premium of $4.00 per contract. However, it would mean that the stock would need to be below $255 by the middle of September. It seems to suggest that someone is betting that the stock reports results that underwhelm investors, resulting in the share falling in the weeks ahead.

Technical Shift

The chart shows that the stock has stalled out after reaching and failing at technical resistance two times around $266. The relative strength index is indicating that the overall trend for equity may be shifting from bullish to bearish.

The RSI hit an overbought level of 76 on July 9, and that RSI has been making lower highs since. It marks a potential turn in the overall trend for equity, forming a bearish divergence marked by the sideways trading price and falling RSI.

Should the stock break support and the uptrend around $250, it could result in the stock falling to a low as $234. It would amount to a drop for the equity by as much as 10% from its current price of roughly $259 on August 19.

Risks

Bullish momentum in the broader market has been the driving force for most stocks, overriding anything that has to do with the fundamentals of a business. Based on that, it seems to be a highly risky bet to try to go against the broader market trends. Additionally, one piece of information that is absent from the options market analysis is whether or not this trade was part of a hedge. Where the trader is long Alibaba and is placing the options bet to protect themselves against downside risk.

The next several weeks should prove if the bearish betting and potential momentum shift prove to be correct.

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This article was written by

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Designed for investors looking for stock ideas and broader market trends.

I am Michael Kramer, the founder of Mott Capital Management and creator of Reading The Markets, an SA Marketplace service. I focus on macro themes and trends, look for long-term thematic growth investments, and use options data to find unusual activity.

I use my over 25 years of experience as a buy-side trader, analyst, and portfolio manager, to explain the twists and turns of the stock market and where it may be heading next. Additionally, I use data from top vendors to formulate my analysis, including sell-side analyst estimates and research, newsfeeds, in-depth options data, and gamma levels. 

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future results.

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