Traders Could Book Fast Profits on This Internet Stock's Breakout

The "Google of China," Baidu (BIDU), was in the news this week when it was announced that Youku Tudou (YOKU), the "YouTube of China," won several copyright infringement lawsuits against the company. Baidu was accused of illegally hosting 18 Chinese television programs to which Youku had exclusive rights. Not only did BIDU not sell off on the news, it actually made a new all-time high that day.

The Beijing-based Internet giant has been a trader favorite for several years. It's easy to see why if we consider the stock's respect for various technical indicators, plenty of volatility, news flow and average daily trading volume of more than 3.5 million shares.

Despite the stock's rough start to 2013, after sliding more than 15% in the first four months of the year, it came back with a vengeance in the second half, particularly with its steep incline in July.

The company reported third-quarter results on Oct. 29, saying revenue grew by more than 42% year over year to almost $1.5 billion. Operating profit was up 1.2% from a year ago to $545.4 million, while net income increased 1.3% to $498 million.

So, with the fundamental picture intact, allow me to walk through the charts to make the case for the long-side trade setup that I am currently eyeing in BIDU. 

On the multiyear chart, note that the rally of the past five months has taken the stock to new all-time highs and back to levels not seen since the summer of 2011.

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BIDU Stock Chart - Weekly
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BIDU Stock Chart - Weekly

Another way to look at the chart is to view the down-swing from the August 2011 highs to the April 2013 lows as a consolidation phase to digest the strong run up from 2009 to mid-2011. If in fact this is the case, then BIDU should have no problem pushing toward new highs in the $180 area.

The consolidation of the past month and a half near the 2011 highs and momentum indicators, such as the slow stochastics, also support a move to higher highs in the medium term. 

On the daily chart below, we see support at the 50-day simple moving average (blue line), as well as a series of bullish engulfing and hammer candlesticks (green arrows) over the past two months. This illustrates that since the early November reaction lows, the bulls have been buying the dips, leaving the bears no chance to growl.

BIDU Stock Chart - Daily
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BIDU Stock Chart - Daily

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BIDU is now pushing up against the upper end of the recent trading range around $168-$170, and the stock stands a good chance of breaking to new all-time highs sooner rather than later. 

The risk management on this trade is very straightforward: A break to new all-time highs would result in a breakout and thus an entry to the trade. Should the stock reverse the breakout within a few days, it could result in a "breakout fake out," which would mean the trade should be exited. 

In other words, patience is key here, and a premature trade should be avoided. If and when the stock breaks out to a new high, momentum should once again be on investors' sides and leave plenty of room for more upside.

Recommended Trade Setup:

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-- Buy BIDU on a daily close above $169.70
-- Set stop-loss at $163.70
-- Set initial price target at $180 for a potential 6% gain in 3-6 weeks

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