With the broad market having entered a correction, this is the time to watch for former leaders who now seem poised for a big fall. If you believe in "the bigger they come, the harder they fall," you may want to consider Baidu (BIDU) as a short play.
China's dominant search engine has enjoyed one of the great runs in stock-market history.
The company went public seven years ago at a split-adjusted 2.70, and peaked 14 months ago at 165.96. Apart from a steep sell-off from November 2007 through December 2008 — as the entire market collapsed — Baidu managed to stage near-relentless advances.
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Baidu's story could hardly have been more compelling. The world's most populous nation was rushing onto the global economic stage after decades of misguided communist policies. Hundreds of millions with new-found wealth scrambled for the necessities of life: food, housing, clothing, cell phones and computers.
The result: China fast became the world's biggest online population. Online advertising boomed as new consumers bought PCs and other digital devices.
Baidu was perfectly placed, the No. 1 search engine in China with an ad-based business model.
Though its shares topped more than a year ago, Baidu's dominance first came into question in August. Qihoo 360 Technology (QIHU) released its own search engine and many were impressed.
In the week ended Aug. 19, 2011, three weeks after hitting its peak, the stock sliced through its 10-week moving average with harsh volume, then struggled to regain the line in weak trade.
The stock bobbed and weaved around the 10-week line for many months, usually showing low volume on the upside and higher action as support failed.
A March breakout failed a few weeks later as the stock gapped down the week ended April 27, 2012. Baidu sliced through both its 10- and 40-week lines.
The stock's failed breakout from a late-stage base is a key prerequisite for a possible short sale.
Resistance at the 10-week moving average is another important signal for potential short sellers. A sell-off in heavy volume from Baidu's current levels might be an opportunity to go short.
But Baidu continues to find support around the 105 level. In fact, that level has provided Baidu a floor going back to at least September 2011. The strong support poses a challenge to any investor trying to short the stock now.
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