Alibaba Stock Flashed This Key Volume Sell Signal Before Breaking Down

Watching your stock hit new highs day after day can be thrilling, but don’t just look at the price action. Volume levels provide valuable clues too, as Alibaba stock did last year.

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If a stock makes fresh highs in heavy volume, that’s a bullish sign: Mutual funds and other institutional investors are buying shares. But if a stock begins to hit new highs in low volume after a big run, that could signal a slowdown ahead.

That’s a heads-up that the stock’s run may be starting to peter out. In fact, when new highs keep occurring in weak trade over a period of at least a few weeks, investors should treat this as a sell signal.

So how can you spot low volume?

For this sell signal, it’s best to pull up a weekly chart of your stock at IBD Stock Checkup or MarketSmith. Near the bottom of the chart, you’ll see red and blue vertical bars. Those bars represent how many shares a stock traded during each week.

The red bars show volume on a stock’s down weeks; blue bars are for up weeks. You can easily see whether volume rose, fell or was virtually unchanged from the prior week.

The red line drawn across the volume bars is the 50-day moving average (or 10-week on a weekly chart) of volume. It shows how many shares exchanged hands each day over the 50 most recent trading days. This helps you spot if volume was above or below average on a given week.

A stock’s volume often tracks above its 10-week moving average when the price hits new highs. That signals that the big money is buying shares.

But if volume trends below average as the stock hits new highs, that’s a red flag. The big money is no longer boosting shares as appetite dries up. Sellers may now wield more influence than buyers over the stock’s future price moves.

Alibaba Stock Signaled Weakness

Let’s take a look at a weekly chart of Alibaba (BABA), circa winter of 2019. After clearing a 188.38 buy point of a three-weeks-tight pattern in November 2019, the stock gained nearly 23% to its peak in mid-January 2020.

The advance occurred during eight straight up weeks following the breakout. But a closer look at volume trends showed warning signs. Volume spiked 60% above average the week ended Nov. 29, when Alibaba stock broke out (1).

The next week, turnover was 15% higher than normal as Alibaba climbed 0.9%. Trading was flat for the next two weeks, then fell 53%, 49% and 23% (2). The stock edged up 1.6% to a new high the week of Jan. 17, 2020, in volume just 1% higher than normal.

Alibaba stock then tumbled 6% the next week, followed by a 3% drop in heavy volume (3). That marked a clear sell signal, as shares fell below the 10-week moving average.

Investors paying attention to the new highs in weak trade, though, may have locked in at least part of their gains before the drop. Alibaba stock lost 26% in 10 weeks from its January peak.

This article was originally published April 16, 2021 and has been updated.

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