Michael Burry of ‘The Big Short’ fame has shown a preference for Chinese technology stocks, with Alibaba (NYSE: BABA) ranking among the key positions in his portfolio.
Recently, BABA has been enjoying an impressive run, driven by increased buying pressure amid underlying strong fundamentals. However, this scenario could signal the need for caution ahead for the e-commerce giant.
At the close of the February 14 session, Alibaba closed at $124.73, up almost 5%, with the stock having surged 46% year-to-date.
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Despite this positive run, the stock’s technicals are flashing warning signs. Specifically, the Relative Strength Index (RSI) indicator shows that BABA has entered its most overbought condition since June 2017, with an extreme reading of 84.41.
Such readings have historically preceded pullbacks. The last time BABA was this overbought, in June 2017, the stock struggled to maintain momentum and eventually corrected.
Adding to the concerns, Alibaba is now testing a key resistance at $125, a zone that previously served as support before the stock’s decline in 2021.
If BABA’s share price fails to break above this spot decisively, traders may turn to profit-taking, leading to a retracement.
Burry cuts stake in BABA stock
This concerning technical setup for BABA comes when Burry, who predicted the 2008 financial crisis, cut his Alibaba stake by 25%, signaling caution despite China’s AI-fueled stock rally.
His Scion Asset Management’s Q4 move came before a surge in Chinese equities, raising concerns given Burry’s history of spotting downturns. With his track record, investors may wonder if the investor sees trouble ahead that others are missing.
Although BABA is in the overbought zone, general sentiment around the equity remains bullish. Several catalysts have triggered the recent rally. For instance, Alibaba’s push into AI, highlighted by the launch of Qwen 2.5-Max, which is perceived to outperform DeepSeek’s R1, has driven investor confidence.
Additionally, the reported partnership with Apple (NASDAQ: AAPL) to integrate AI into products in China adds to this bullish outlook. Moreover, impressive earnings that aligned with expectations eased concerns about margin pressures.
Meanwhile, as a key player in the Chinese economy, Alibaba stands to benefit as optimism around the country’s technology sector grows. This was evidenced by a reported meeting between Alibaba founder Jack Ma and Chinese President Xi Jinping. China’s tech sector has struggled with regulatory challenges recently, and the meeting could signal an optimistic future.
Wall Street taking note of BABA stock
On the other hand, BABA’s recent performance has not gone unnoticed over at Wall Street. As reported by Finbold, on January 9, Citi’s Alicia Yap reaffirmed her ‘Strong Buy’ rating on Alibaba and raised her price target from $133 to $138. She called prior estimates for Alibaba’s merchandise volume conservative.
Barclays’ Jiong Shao also reiterated a ‘Strong Buy’ after Alibaba’s earnings but lowered his target from $137 to $130, citing margin concerns amid the company’s investment cycle.
The stock could also see a notable shift after the February 20 earnings report. Analysts estimate that for Q4 2024, Alibaba’s revenue could reach about $39 billion, up 7.06% year-over-year. For Q1 2025, revenue is forecast at $33.4 billion, reflecting a 7.44% increase.
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