Baidu Weakness Could Signal China Top

Chinese internet giant and Nasdaq 100 component Baidu, Inc. (BIDU) reports fourth quarter earnings after the close on Feb. 13, with shareholders growing nervous that the most recent failure to mount 2014 resistance above $250 could signal a major top. The stock is now trading under the 200-day exponential moving average (EMA) for the first time since June 2017, indicating that bears have taken firm control since the most recent uptick ended in mid-January.

Chinese stocks turned sharply higher after the 2016 presidential election, lifting the iShares China Large Cap ETF (FXI) into 2015 resistance at the start of 2018. The ETF has dropped nearly eight points in the past two weeks, matching Baidu's bearish tape, suggesting that the group has entered a steep correction or intermediate downtrend. Similar reversals across the emerging market universe have intensified this bearish feedback loop, telling positioned players to take defensive measures as soon as possible. (See also: Emerging Market Funds May Have Topped Out.)

BIDU Long-Term Chart (2005 – 2018)

The Beijing blue chip came public on the U.S. exchanges at $6.60 in August 2005 and fell into a downtrend that continued into the first quarter of 2006, dropping the stock to an all-time low at $4.44. The subsequent uptrend topped out at $42.92 in November 2007, ahead of a downturn that intensified during the 2008 economic collapse. Selling pressure ended at $10.05 in December, yielding a strong recovery wave that completed a round trip into the prior high in October 2009.

It broke out in the first quarter of 2010, entering a powerful trend advance that topped out at $166 in 2011, at the same time that commodities ended a multi-year uptrend. A decline into 2013 found support in the low $80s, ahead of a July 2014 breakout above resistance at the 2011 high. The uptick added more than 80 points into November and rolled over, failing the breakout in a brutal sell-off that reached $100 during the August 2015 mini flash crash.

Price action in the past 31 months has been stuck within the 2014 into 2015 trading range, with the exception of a failed breakout attempt in October 2017 and January 2018. The stock crossed into a monthly stochastics sell cycle in November 2017, predicting at least six to nine months of relative weakness, with the indicator now expanding through the panel's midpoint. This makes a longer-term bottom unlikely until at least the second quarter. (For more, see: Baidu vs. Google: How Are They Different?)

BIDU Short-Term Chart 2014 – 2018)

Fibonacci grids stretched across the 2014-2015 decline and 2015-2018 advance organize price action into narrow zones that identify hidden support and resistance. The most recent sell-off has now entered a support zone between $208 and $220, roughly aligning with the 200-day EMA. A bounce near this price zone after earnings seems likely, with the $230s marking short-term resistance. 

The stock could face a more important test around the zone between $187 and $193, which roughly marks support at the 50-month EMA and round number $200. A bottom around that zone could generate a much stronger recovery wave that completes a multi-year cup and handle breakout, while a breakdown would set off even stronger sell signals, suggesting a long-term downtrend that tests 2016 lows.

On-balance volume (OBV) topped out in 2011 and declined into 2013, while the 2014 rally failed to pierce the midpoint of the two-year range. It lost additional ground between 2014 and 2017 while failing to make up that deficit during the late-year rally to an all-time high. While this price action generates a bearish divergence, the stock trades on multiple exchanges worldwide, making OBV's U.S.-centric signals less reliable.

The Bottom Line 

Baidu heads into this week's fourth quarter earnings report with its back against the wall following a two-week 52-point decline that has dropped the stock to a six-month low. Short-term oversold technical readings favor a bounce after the news, but aggressive short sellers could reload positions quickly. (For additional reading, check out: Are Bitcoin and Crypto Prices Totally Dependent on China?)

<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>

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