Two and a half months ago, on May 7th, we analyzed the daily price chart of Alibaba stock and reached the conclusion that once the bulls lift the shares to a new all-time high near $220, a bearish reversal should be expected. Two things happened since that analysis: first, Alibaba stock climbed to $211.70 in early-June; second, the bears returned to drag the price to as low as $181.06 on July 2nd.
BABA closed at $187.25 last Friday. While the high quality of Jack Ma’s creation is out of doubt, a successful stock investment demands a reasonable price, as well. Should investors buy the dip right now or wait for another decline to offer them an even better deal? The updated chart below helps us find out.
As visible, the bull market from $57.20 to $211.70 is a textbook five-wave impulse with an extended third wave. According to the Elliott Wave Principle, every impulse is followed by a three-wave correction of the same degree in the opposite direction. The problem is that Alibaba’s drop to $181 is relatively small in comparison to the impulse it is supposed to retrace.
Therefore, it seems to be just the beginning of a larger (a)-(b)-(c) pullback, whose initial targets lie near $150 a share. This means the stock could lose another 20% from current levels before it begins to recover. If this count is correct, it is too early to buy the dip in Alibaba stock. Better entry levels should reveal themselves in the months ahead.
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