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Can Alibaba & DiDi Stocks Bounce Back? Photo in front of Alibaba with I love Taobao statue.

Mar 18, 2022

Can Alibaba & Didi Stocks Bounce Back After the Recent Bear Trend?

By:Ryan Sullivan

Didi Global Inc. (DIDI), based out of Beijing, China, is a technology company and provides app-based ride hailing services across Asia Pacific, Latin America, and Africa. Alibaba Group Holding (BABA), headquartered in Hangzhou, the People’s Republic of China, is a technology company that provides global marketplace services for consumers, merchants, and other market participants on several platforms. The western marketplace is familiar with Alibaba.com and AliExpress.

Didi (DIDI) began trading on June 30th, 2021, which is the same day it recorded its all-time high of $18.01 and posted its current all-time low on March 11th, 2022. Alibaba (BABA) recorded its all-time high on October 27th, 2021, and recorded its low of 2022 on March 15th, 2022, at $73.28.

Technically, both Didi and Alibaba have been in a bear market trend since their all-time highs in mid to late 2021. Each recording lower highs and lower lows since their all-time highs. Since these two technology services companies operate in similar geographic marketplaces, we can reason that the bear market each has been recording is due to similar market forces.

Figure 1: 9-Month Price Percent Change for SPY, BABA, and DIDI

Will the Bear Trend Break for DIDI and BABA?

As of this morning, Didi (DIDI) and Alibaba (BABA) maintain their bear trend, even though each has seen a significant rally since Monday March 14th, 2022. Since Monday, Didi has seen an approximately 106.29% rally and Alibaba has seen an approximately 41% rally. Each of these rallies was preceded by large drops in price, returning both Didi and Alibaba to trading ranges that we saw the week before, after their rallies since Monday.

As a result of these significant price swings in Didi (DIDI) and Alibaba (BABA), we have seen a drastic increase in volatility for both. As of this morning, the tastyworks implied volatility rank (IV Rank) calculation for Didi is 79.4 with 132 million shares traded and Alibaba’s IV Rank is 52.9 with 34.2 million shares traded, so far today. Their high IV Rank and extremely high liquidity make these two products ripe for premium selling.

However, we are likely to see continued surges in price up and down for each of these products as buyers and sellers battle to either continue the bear trend or transition into a new trend. It appears that over the last two weeks we have seen a long squeeze play out. This occurs when buyers enter the market and place stop-loss orders below the market price. These stop-loss orders are hit as long positions cover and create a chain reaction for all protective stop-loss orders, causing strong selling pressure.

We can use the long squeeze market phenomenon as an indicator, implying that market participants want to enter long positions. Possibly indicating that we are seeing a meaningful change in trend that will result in a bull trend in the near term.

Does a Macro Market View Help Us Develop Perspective on DIDI and BABA?

It is difficult to look at the SPDR S&P 500 ETF (SPY) and not see the market moving towards a bull trend. Technically showing us higher lows and higher highs since February 24th, 2022. Although it is likely that the market price of the SPY oscillates in the $420.70 to $454.06, we could see a move to a higher price range in the near term.

We must consider that the SPDR S&P 500 ETF (SPY) components do not perfectly represent the markets that Didi (DIDI) and Alibaba (BABA) share. It is possible that the SPY and DIDI/BABA market price diverge and move into a lower correlation relationship because of the difference in markets that the SPY component companies serve versus the primary markets that DIDI and BABA serve.

Figure 2: 12-Month Price Percent Change for SPY and FXI

Figure 3: BABA and SPY 3-Month Rolling Correlation Starting in 2016

Figure 4: DIDI and SPY 3-Month Rolling Correlation Starting in October of 2021 (When DIDI Began Trading)

If you want to take advantage of the premium selling opportunities that Didi (DIDI) and Alibaba (BABA) present, stay small and slowly build your positions. Hedge your positions by defining your trades if you want to be directional. Sell iron condors or strangles, which inherently hedge themselves, if you believe trading ranges will develop over the near term.

To trade Alibaba or DiDi stocks, open an account on tastyworks.

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