Why Did Baidu's Base Fail? Late Stage And Dim Volume

"Why did this base fail?" That's a question you've probably asked yourself more than once, as a stock in which you had held high hopes — and a long position — fell hard.

Let's examine an example of a stock that seemed to have built a great base — until you look closely: Chinese search engine Baidu (NASDAQ:BIDU - News), a market leader which over the course of two years showed plenty of great bases that led to big gains.

Baidu built a cup-with-handle base from late April through mid-July 1 of last year. It contained elements of a double bottom as well and a few weeks of solid accumulation. What was wrong with it

First and most seriously, it was a late-stage base. Here, Baidu's years-long success starts to take its toll.

With no undercuts along the way (when a stock falls enough to undercut the low of a prior base, its base count is reset to zero), Baidu was building a fifth-stage base.

From December 2008 to April 2011, it had soared from a split-adjusted 10.05 to 156.04. Expecting more would be pushing one's luck.

Then there's that split. Baidu did manage to shake off that overzealous 10-for-1 stock split of May 2010. But the huge increase in share supply would have to take its toll at some point.

In July 2011 you're looking at Baidu's new base, which corrects just 27% (attractively shallow). And you know that every time you've ignored a Baidu base, you've missed an opportunity.

So maybe you buy the stock at 139.19, as it breaks out from a double bottom 2 while it's still relatively deep within the base, a flaw. Or perhaps at 148.54, as it pushes from a cup-with-handle. 3

Either way, the stock told you all was not well. Two chart interpretations, two bases, two buy points — and no volume surge on either breakout ( 4 and 5).

How many times have you seen an otherwise perfect base fizzle out for lack of volume? And remember, we've just picked over a few flaws in Baidu's base.

Baidu went on to shape another double-bottom base. 6.But this one was lopsided; the middle peak appeared too far on the base's right side. Massive sell-off volume and a 39% correction — too deep — gave this base an ominous look.

Baidu never broke out from this base. Hopefully, you'd had your fill of Baidu when you saw the stock unable to score any special volume in its earlier breakout attempts.