How to Trade Baidu on Strength Following Earnings Beat

Baidu (BIDU) reported better-than-expected revenue in its earnings report released after the closing bell on Wed., Oct. 6. The stock began November above its fourth-quarter pivot at $102.40. As a result, the stock ended last week with a positive weekly chart. This chart setup favored a positive reaction to earnings. My call is that the stock will “fill the gap” to its May 17 low of $126.91.

Baidu is a Chinese technology giant specializing in Internet applications including artificial intelligence. The company trades in the U.S. as an ADR (American depository receipts). In dollar terms the company took in $3.93 billion in revenue in its third quarter at the upper end of its guidance of $3.84 billion to $4.07 billion.

The stock set its all-time intraday high of $284.22 during the week of May 18, 2018 and then crashed 67% to a multiyear low of $93.39 set on Aug. 15, 2019. Baidu closed Wednesday at $107.36 down 32.3% year to date and in bear market territory 42.3% below its 2019 high of $186.22 set on April 8.

Baidu is trying to recover from the economic slowdown in China and the ongoing trade war with the U.S. On May 16, the company missed earnings estimates for the first time since it became a publicly traded company in 2005. In the May 16 report, analysts noted that Baidu has been losing market share to NetEase in the gaming space and was knocked off China’s five most valuable Internet companies.

The daily chart for Baidu

Courtesy of Refinitiv XENITH

The daily chart for Baidu clearly shows the price gaps lower that occurred following its May 16 earnings release. The close of $158.60 on Dec. 31 was an input to my proprietary analytics and its annual risky level is above the chart at $242.91. The close of $117.36 on June 28 was another input to my analytics and the semiannual risky level is $149.36. The close of $102.75 on Sep. 30 was also an input to my analytics and its quarterly pivot is $102.40 which held as a value level as November began.

The weekly chart for Baidu

Courtesy of Refinitiv XENITH

The weekly chart for Baidu is positive with the stock above its five-week modified moving average of $107.83 and well below its 200-week simple moving average or “reversion to the mean” at $186.72. This average was last tested during the week of Nov. 2, 2018 when the average was $200.30. The 12x3x3 weekly slow stochastic reading is projected to rise to 54.40 this week up from 47.89 on Nov. 1. At the August low this reading was below 10.00 at 7.69 which made the stock technically “too cheap to ignore.”

Trading Strategy: Buy weakness to the quarterly value level at $102.40 and reduce holdings on strength to the price gap to the May 17 low at $126.91.

How to use my value levels and risky levels:

Value levels and risky levels are based upon the last nine monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31, 2018. The original annual level remains in play.

The close at the end of June 2019 established new monthly, quarterly and semiannual levels. The semiannual level for the second half of 2019 remains in play.

The quarterly level changes after the end of each quarter so the close on Sep. 30 established the level for the fourth quarter.

The close on Oct. 31 established the monthly level for November.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in.

To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.

How to use 12x3x3 Weekly Slow Stochastic Readings:

My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold.

Recently I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an “inflating parabolic bubble” as a bubble always pops. I also call a reading below 10.00 as being “too cheap to ignore.”

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