If the trend is your friend, China's Baidu (NASDAQ: BIDU ) continues to show strong support for bearish investors following earnings - and an even stronger short in BIDU stock on the price chart. Let me explain.
Wall Street has been more than a bit cautious on BIDU stock the past two months despite the broader market enjoying one of its more memorable, jaw-dropping rallies following an equally dramatic corrective move.
Most of the market-lagging pressure on BIDU had been tied to concern over Baidu's non-democratic practice of favoring low-quality results tied to the company's blog site. As of Friday, though, investors have another reason to be worried following Baidu's latest and poorly received corporate confessional.
Bottom line, Baidu delivered a decent-sounding earnings report this past Thursday night. But a failure by Wall Street's bears to throw up the white flag Friday - and instead solidify an increasingly red and ominous-looking flag on the price chart - doesn't bode well for BIDU stock bulls.
BIDU Stock Weekly Chart
As noted above, BIDU has badly lagged the broader market the past couple months. To add a bit of color, the S&P 500 upended a hard-hitting correction and fleeting move into bear market territory by quickly reversing course and putting together a powerful V-shaped bottom that's gained roughly 20% since late December.
By comparison, shares of Baidu have rallied a much more modest 8%. Also, that same price action has continued to improve upon a developing bear flag formed against a wall of technical resistance backed by Fibonacci levels and staunch price congestion built over the past few years. Yet I wouldn't say the writing was on the wall (or on the price chart) for BIDU until Friday.
An earnings report which could have elicited a "better-than-feared" response, instead found investors still willing to pressure BIDU stock in the immediate aftermath of the earnings release. Now and with shares sporting an overbought stochastics and confirming a two candlestick doji topping pattern within the bear flag-bears are in position to short and profit from continued downside in BIDU stock.
The BIDU Stock Trade
For traders agreeable with what's been discussed, there's definitely more than one way to approach a pattern short entry in BIDU stock. I personally favor shorting shares today given Friday's bearish confirmation. I also like using a stop-loss slightly above the high of bear flag. This allows for less than 6% of exposure in shares and only exiting for a loss if the current pattern is invalidated.
On the downside and as an initial target for taking profits, the 50% retracement level near $147 in Baidu shares looks very approachable.
Alternatively and for those who may want a bit more pattern confirmation, if shares break below $162, the bear flag's angular support would be penetrated. Traders could also wait for the flag's low of $154.71 to fail before entering into a BIDU stock short position.
For these approaches, the suggestion would be to use a money stop of 6% to 8%, or smaller-position sizing if a technical exit using the pattern high is decided upon. And if all goes well, as an initial downside target of BIDU's angular trend-line with support near $135 seems about right.
Investment accounts under Christopher Tyler's management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler's observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual.. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits .
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