Alibaba Stock Forecast: BABA shares down sharply in premarket

• BABA shares are paring their midweek gains in premarket.
• US SEC placed new scrutiny on Chinese listings.
• China pushing new security protocols for tech companies.

After investors headed for the exits on dastardly news in the early part of the week, Alibaba (NYSE: BABA) has recovered from the Monday low of $179.72. It closed up an uncertain 1.5% on Thursday, though DiDi Global (NYSE: DIDI) – the initiator of the recent fear among Chinese investors – rocketed up more than 11% on rumours of going private. BABA appears to be the fodder for a dead cat bounce as shares are down 3.6% in Friday’s premarket at the time of writing.

BABA stock: No traction for reversal

Thursday’s share price rise appears bearish in hindsight. Though BABA opened more than $4 higher at $200.26, more than 2% higher, it could not retain momentum and collapsed early in the session even below Wednesday’s close before rising toward the end of the session.

To cap, just a week after BABA’s all-time high last October, Chinese regulators abruptly suspended the IPO of subsidiary ANT Financial, which was only the beginning of the government’s crackdown of Chinese internet and cloud companies. The regulatory onslaught was reignited earlier this month the day after Didi Global (NASDAQ: DIDI) held its US IPO. After that both Tencent and Baidu received steep fines, and ByteDance was also summoned by regulators for discussions.

Now Bloomberg is reporting that China has demanded major security fixes and consumer protections to 25 large tech companies, including Alibaba. Though BABA is a gigantic and growing consumer tech staple that has ignited the curiosity of many a US hedge fund in seasons past, its proximity to further Chinese regulatory actions make it untouchable for most. 

ARK Invest’s Cathie Wood has traded out of many of her top Chinese tech names completely. In a talk she gave in early July, the much-tracked growth investor said, "From a valuation point of view, these stocks have come down and again from a valuation point of view, probably will remain down." The US Securities & Exchange Commission also issued new protocols on Friday to apply addtional scrutiny of Chinese companies seeking to list on US stock exchanges, a move that will halt new listings.

BABA chart: Not much space for true rally

Alibaba's first roaring and then sheepish rally this week appears to be fizzling out. The stock is selling off steeply in the premarket near $190, a psychological barrier. If major instituions decide to sell, then investors should brace themselves for another test of the $180 level. BABA stock has remained in a descending trend channel since last autumn. Now that the triangle is narrowing, the upside possibility seems scant. The stock closed near the S2 pivot on Thursday, which may actually be resistance based on today's premarket activity.

BABA daily chart

The weekly chart gives a 37 reading on the Relative Strength Index (RSI), meaning BABA stock may be far from oversold despite what some say. Additional support can be found near $175. Above here, BABA shares would need to witness a weekly close above $213.08 to break out of the top trend line and scare away the bears. Though Alibaba appears cheap by many standards – the P/E is well below expected revenue growth – few major investors will be buying heavily with so much regulatory uncertainty.

BABA weekly chart