Before the Open our newest traders met at my desk to discuss the stocks to watch, including $BABA.  When trading IPOs there are two important considerations:

1) momentum

2) technical levels

Below yesterday low of 89.50 tipped the momentum down.  Below 89.50 and BABA was at all-time lows, if you can say such a thing about an IPO trading 30 points above its IPO price.  During our pre-open meeting I counseled to “lean short” until we find the next very clear support level.

Well 88 in BABA became a clear support level.  It could not trade below there.  And bounced to 89.  Was BABA headed back higher?  Or was it just in a range of between 88-89 with the momentum bearish since it was below yesterday’s 89.50?  I wasn’t sure.  I didn’t know.  But I was asking the right questions and going through the proper thinking.  We call it being a pro trader.

What happened next?

$BABA pulled in way too far from 89, even below VWAP.  For 88 to be the turning point from a weak Monday and Tuesday open, we would expect a shallow pull in.

Next I wanted to watch the upmove from near 88, the next natural move higher in the stock.  That move was weak, barely clearing 88.50.

Now it was time for me to put my shorting pants on.  If BABA rolled over and held below VWAP, I would initiate a short around 88.35ish.  And then add below 88 and 87.90, to a position of Tier 3.  This is exactly what happened.

But below 88, I expected a washout.  What did I see?  Way too much buying on the bid causing less confidence in my short and a pattern that was now offering squeeze risk.  I covered to Tier 2 when BABA did not drop quickly below 88 and sat in a Tier 2 short, since it was still below important levels.

As BABA made new lows I added back to Tier 3 and scaled out into the downmoves.  Every 50c I scaled out of some of my core Tier 2 position getting down to 3/4 of Tier 1 at 87.

Also, I was stopped out of a quarter of my remaining above 88 and held the rest into the close.

Tomorrow I will watch the levels I learned from today, 87 and 88.   There will be more opportunity in BABA to come.

I hope how I attacked BABA today might help your trading in IPOs.

Trade well!

“You can be better tomorrow than you are today!”

Mike Bellafiore is the Co-Founder of SMB Capital and SMBU, which provides trading education in stocks, options, forex and futures. Bella is the author of One Good Trade and The PlayBook.

He welcomes your trading questions at [email protected].

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