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Baidu Inc (ADR) Is Likely to Falter Before it Flies (Again)

I’ve said it before and I’ll say it again — Baidu Inc (ADR) (NASDAQ:BIDU), the so-called Google of China, is one of the region’s most compelling buys. And that’s saying something, considering BIDU stock is in the company of other high-octane players like Alibaba Group Holding Ltd (NYSE:BABA) and Weibo Corp (ADR) (NASDAQ:WB), both of which are growing at breakneck speed as well. The best days of China’s internet explosion are ahead rather than behind.

On the other hand, while I fully expect the BIDU stock price to be even higher two years from now, I’m also afraid the next two weeks — and maybe even two months — could be miserable for faithful Baidu investors.

Baidu Is On the Fence

Baidu, on the off-chance you’re reading this but aren’t aware, primarily operates China’s favorite search engine. As of earlier this year it owned about three-fourths of the search market there, and like its Western counterpart Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG), being there makes it much easier to stay there. Baidu’s got the growth to prove it.

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Just like Google shares though, sometimes the BIDU stock price can take on a life of its own, moving indiscriminately, and possibly suffering the result of such a move.

It looks like owners are about to go through such-suffering, if the last-bastion support level fails to hold up as a floor.

Baidu, BIDU stock daily chart
Baidu, BIDU stock daily chart


Click to Enlarge 

The weekly chart of Baidu puts things in perspective, in a bigger-picture sense. Right on cue, BIDU stock broke out of a long-term converging wedge pattern in July, and once it got rolling it never looked back … until late October. That’s when its Q3 earnings report (and its fourth quarter earnings guidance, to be specific) pulled the rug out from underneath the stock.

The shape of the chart, and the shape of the individual weekly bars themselves, are a red flag. The doji bar (marked by the arrow) at the end of a rally followed by a tall bearish bar the next week makes up a three bar pattern called an evening doji star. The pattern usually kick-starts a bearish move, and this one hasn’t let us down.

There is one glimmer of hope for owners of BIDU stock, though it’s a long shot.

Baidu, BIDU stock daily chart
Baidu, BIDU stock daily chart


Click to Enlarge

You can see it on the weekly chart as well as the daily chart. The 100-day moving average line (gray) currently at $227.40 has clearly been treated like a technical floor, prompting a strong intraday bullish reversal on Wednesday. Unfortunately, the pullback that set up the bounce also pulled BIDU stock under a key line at $232.20, which has proven to be support as well as resistance since late July.

It remains to be seen which side of that fence traders really think Baidu shares should be on; Wednesday’s intraday turnaround isn’t quite a convincing hint the tide is poised to turn in a bullish direction again.

Bottom Line for BIDU Stock

As for the most plausible outcome from here, this is a case where it pays to understand what’s not readily apparent on the part of the chart you can see, and understand a stock’s tendencies going way, way back in a stock’s history.

Simply put, Baidu shares aren’t the kind that tend to make small “regrouping” moves and then rekindle a bigger trend. This is a stock that has a history of moving very little (a la the 2015/2016 wedge), or catapulting higher or lower. The odds of a minor pullback after a major rally a pretty slim. History says we should look for a major pullback now, even if that selloff doesn’t drag BIDU stock all the way back to where it started.

Not that the odds are any sort of guarantee. In fact, the term “odds” is by definition not a guarantee.

Either way, a break under the 100-day moving average line should serve as a signal that the bears are looking to make good on the evening doji star from four weeks ago. Should that floor break, a trip back to near the 200-day moving average line (green) at $203.30 is a distinct possibility. Conversely, until BIDU stock moves above the now-converging 20-day and 50-day moving average lines around $247.00, this stock is anything but out of the woods.

The waiting is the hardest part.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.

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