image of BABA stocks trading journal header

Trading Journal for Short on BABA

In a recent article we showed how the “Day Trading Add-On Suite for ThinkorSwim” can be setup to take a look at stocks. In this Journal article it will be shown how a short trade in BABA could have been setup and taken after the recent bearish earnings reaction.  We will also isolate the “Elliott Wave Indicator Suite for TOS” on the BABA earnings highs that were rejected such that we can track the wave count.

A Careful Look at the BABA Trend

BABA had been on watch for a potential long after what appears to be a deep pullback.  However, that viewpoint changed after the very bearish earnings reaction on what appeared to be good earnings.  From that point forward the lean was to the short side.  On an hourly chart, the MTF Dot Cloud settings for the row time-frames I used were Monthly, Weekly, 3 Day, Day, and 4 Hours – the top row is the chart time-frame and in this article that was a 1 Hour Chart. (Please refer to a prior article on how to setup the MTF Dot Cloud for stocks).  The Monthly dot cloud (bottom row) indicator shows green so at first glance it appears we are pulling back against a bullish monthly trend indicated by the green dots.  Let’s take a look at the Monthly and Weekly charts to examine BABA a bit deeper to see if it supports a potential thesis of going short that coincides with the earnings price action. (Click on all images to enlarge in a different window)

image of BABA Monthly trading chart

On the Monthly chart above we can see that price is in fact headed towards rising monthly support as noted by the pink cloud. Note that at the time of the earnings look, the monthly chart had not yet broken support as denoted by the gray price support zone that had prior been drawn on the chart. So, this look does indicate that although price is falling it is not yet below the dynamic support cloud. (although there is a way to go to reach it).  There are two potentially bearish indications. The False Breakout Stochastic from the “Elliott Wave Indicator Suite for TOS” is beginning to fall indicating a potential fall in momentum as well as the MACD difference line has crossed below the zero line.

Let’s take a close look at the weekly chart.

image of BABA Weekly trading chart

This picture does paint a bit of a different story.  The 5/35 Oscillator “Elliott Wave Indicator Suite for TOS” is showing negative divergence (it is making a lower high when price is making a new high). Also the false breakout stochastic is showing a more bearish red arrow indicating downward momentum.  Price had broken below the W5T Cloud on this weekly chart and has been below it for a couple of weeks before earnings yielding at least on a weekly time-frame a bearish viewpoint.  Given the bearish reaction to earnings and the weekly chart view I have validated my thesis that looking for a short on a smaller time-frame is a good risk to take.

BABA short trade setup on an Hourly Time-frame

image of BABA Hourly trading chart with W5T MTF Dot Cloud

On the hourly chart we can see the earnings gap up and sharp rejection with a close of the day on the low and below the prior day’s low.  Typically, one would give it the “three day rule” and wait 3 days before trading BABA to see how the earnings reaction shakes out.  On the “Elliott Wave Indicator Suite for TOS” we have isolated the indicator on the post earnings high (where the “A” shows up) and see that we’ve gotten a wave “1” low followed by a “2” a couple of days later.  During the third day we do see that this wave 2 pivot, a lower high than the earnings gap up, is beginning to reverse back down towards a potential wave 3. The strongest wave of an Elliott Wave sequence.  On the W5T Dot cloud we already noted that the monthly green row is in fact still a support zone some 20$ or so below us but we have validated at least on a weekly and daily time-frame and as well via the earnings reaction that BABA is weak.

We see small pullbacks as noted in the W5T dot cloud indicator (green and blue colors opposite the red bearish dominant color in this time area).

The hourly time-frame starts to go below the W5T Cloud and as soon as all the other time-frames (highlighted by the blue oval on the W5T Dot Cloud) except the monthly time-frame turn red we are validating a short term bearish trend.  That price candle coincident with the alignment of cloud breaks on the W5T Dot Cloud signals a short blow that candle’s closing price at 175.26.  Our stop is placed aggressively above the cloud at 178.75 with the idea that if we start back up through the cloud we may have in fact exhausted this downward trend.  The target is getting into the support zone and the prior low to the left at 165.39 yielding a reward to risk ratio of over 2.8:1.  Trade entered later that day.

Trade Management

Once price broke below the “1” wave, closed that day below it and the next day gapped down, the stop was moved to the “1” pivot price area.  Price continued down into the support zone on bearish volume and broke that zone that day.  Once we got into our target area we started trailing our stop to the high of two candles behind. This trade was taken off near the open of the next day, Sept 16, at the opening gap up for 12.5 points gain overall and over 3:1 on our reward to risk ratio. 

Summary

This journal article examined the use of the “Day Trading Add-On Suite for ThinkorSwim” in conjunction with the “Elliott Wave Indicator Suite for TOS” for stock trades like this BABA short.  Having a thesis on a short list of stocks that you would like to trade. But allowing the charts and price action along with a small set of indicators help to tell you the story will help you on your journey towards your own success.  Although the original thesis was looking for the pullback to go long. When the picture tells you differently you have to do the required homework and get the story from the picture not force your story onto the picture.  This case was recognizing continued weakness of BABA in the face of good earnings and then setting up the trade to go with the current short trend.

 

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