Diary of a Financier

Watch list: Baidu about to provide my entry point

In Capital Markets on Fri 30 Aug 2013 at 12:06

I’ve been tracking Baidu Inc. ($BIDU), the Google of China, for a couple months now. I wanted to record my thoughts and analysis.

BIDU is a fantastic opportunity to leverage the Chinese consumer and their rising middle class, while controlling for the negative byproducts of their BIDU fundamentals (2013.08.30)macroeconomic growing pains (shift away from fixed investment/exports toward consumption).

My short term technical analysis of BIDU butts-heads with a lot of traders out there, like Options Addict over at iBankCoin, who’s immediately bullish on the name, pairing short term long calls with a long position on the underlying stock.

Here are my chronological technical notes:

7/16- daily falling wedge breakout w $118 target (50% fib resistance), part of LT bull flag (target $166).

7/25- 2q13 EPS & Rev beat (1.22 v 1.21 & 1.23 v 1.20B), shs gap up +10% at open: online marketing rev +38.3% ($1.228B).

7/26- wait to buy, rather miss the trade than have it fill down gap: LT bull flag breaking out (ST falling wedge); weekly 2x bull divergence; monthly bullish.

8/23- expect pullback & buying opportunity: daily potential C&H keeps testing rim @ $143 w ST 2x bear divergence, breakout will fill gap >144.5; weekly LT bull flag still primary pattern; monthly indicators bullish.

That brings us to today, when I’m envisioning a breakdown that’ll provide my entry point. I noted these technicals earlier today (I & II).

As you can glean from the notes above, BIDU’s primary pattern is a weekly long term bull flag that’s already started rallying after April’s lows. In the shorter term, BIDU has formed a 30-minute Head & Shoulders top with a $134 neckline and 3x bear divergence.BIDU 30min Neckline support held the right shoulder’s first attempt to pass southward, now a 1x bull reversal would materialize if BIDU trades up next week, saving the stock from a correction.

That H&S peaked at the $143 rim of a daily long term Cup & Handle. Thus, the charts weave a narrative that suggests BIDU will break down below it H&S neckline to form the handle of its maturing C&H. There’s weak 1st support at $125, but I’ll start buying at $120 all the way down to $113. These entry points are 38.2% and 50% Fibonacci retracement levels, which straddle the gap up from 2q earnings.

The weekly fractal is overbought too, supporting this notion of a short term pullback. Of course, the overarching constructions are bullish, with that aforementioned weekly long term bull flag and bullish monthly indicators:

BIDU daily/weekly/monthly

BIDU daily/weekly/monthly

If BIDU plays out as envisioned, I’ll enter the position.  If not, I won’t have an edge, and I’ll have to reassess.

~~~~

I’m loathe to add net exposures right now, since we remain overweight risk and there’s the looming potential for geopolitics to deliver an exogenous shock—a known-unknown (Grey Swan). Allocation is 66/28/6% (stocks/bonds/cash) vs 60/40 benchmark; beta is around 0.91 vs 0.76 benchmark; sigma 1.08 vs 0.49 benchmark.

We’ve been sitting on a General Electric ($GE) position that’s done nothing but pay dividends since April. I plan on selling GE to free up cash, which I’ll likely allocate into BIDU. We might do some other sell/buy/add shuffling, but I’m waiting for entry points on the Europe ETF ($FEZ), Brazil ETF ($EWZ), Standard Motor Products ($SMP), and WestJet Airlines ($WJA.TO). Similarly, I’m also waiting to add to the Japan ETF ($DXJ).

–Romeo

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