Baidu Stalls After Support Break

03/07/08 12:22:49 PM

by Arthur Hill

After breaking double-top support in January, BIDU stalled over the last few weeks as volatility contracted. The stock is winding up for a move, but which way?

Security: BIDU
Position: Hold

Figure 1 covers the double top that formed from October 2007 to January 2008. The highs mark resistance around 420 and the lows mark support around 300. The stock broke support with a decisive move lower in January. This breakdown was bearish and sets the tone for the stock. The length of the pattern is subtracted from the support break for a downside target around 180 (420 - 300 = 120, 300 - 120 = 180). This target is just above support from the July–August lows.

FIGURE 1: BIDU, DAILY. Here's the double top that formed from October 2007 to January 2008.

Graphic provided by: TeleChart2007.

After breaking support, the stock continued lower and then consolidated in February. This consolidation formed a triangle as volatility contracted. The pink indicator shows the Bollinger Bands are their narrowest in months. The triangle also shows that the trading range is contracting as the upper and lower trendline close in on each other. A break from this consolidation will trigger the next signal for BIDU. Given the confirmed double top, the odds favor a break to the downside. See Figure 2.

FIGURE 2: BIDU, DAILY. With two moving averages, this classic indicator combines momentum and trend-following.

Graphic provided by: TeleChart2007.

The bottom indicator shows good ol' moving average convergence/divergence (MACD). With two moving averages, this classic indicator combines momentum and trend-following like no other. The MACD has been rising the last few months and is nearing the zero-line. The indicator remains above its signal line and momentum is still improving. I am watching this signal line to confirm a support break in the stock. A move below the signal line would keep the MACD in negative divergence and turn momentum bearish.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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