Sometimes it’s better to forgive and forget. But when it comes to China’s Baidu (NASDAQ:BIDU), it may be a better idea to not turn a deaf ear or blind eye and instead consider shorting BIDU stock.
Let me explain.
As with diversified technology and search peer Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), which has seen its own share of missteps and problems the past couple years, there have still been occasions to be bullish and bearish on Baidu. But the company’s latest controversy may prove the point of no return for BIDU stock bulls.
Baidu is facing growing criticism from Chinese search users and a growing group of influential journalists for its non-democratic practice of favoring low-quality results tied to the company’s blog site.
The assertions against Baidu target the company’s role in promoting the rise of Quanjian. The outfit is a questionable healthcare products manufacturer that has been under investigation for using a pyramid scheme and misleading marketing practices.
For its part, Baidu isn’t sitting around and has threatened legal action against one prominent journalist’s “defamatory” allegations. Yet today’s situation is eerily reminiscent of BIDU stock’s 2016 scandal and what ultimately led to the death of a young cancer patient. Further, set against an already difficult macro operating environment, this may prove a good time to not ignore the bearish evidence off the price chart … or on it for that matter.
Since establishing multiple failed breakout attempts from late 2017 into last summer, BIDU stock has trended lower. Of course, Baidu’s weakness hasn’t been an isolated case of difficult price action for bullish investors. Still, dismissing today’s signs that further pressure is on its way is a perilous decision.
It’s our contention that the action in the BIDU stock price has taken shares from being a simple correction into a more threatening longer-term bear market. The latest warning is Baidu’s bearish flag setup, which has formed beneath prior pattern support and the 50% – 62% retracement levels.
The price zone should have acted as longer-term price support for Baidu stock and its failure to hold doesn’t look good for bulls.
The BIDU Stock Trade
Looking forward, the rather alarming price action sets the stage for a full-blown test of BIDU stock’s 2015 low of $100. As such, for any non-hedged Baidu investors still clinging to the idea that Baidu is a contrarian-based opportunity, pulling the plug on any positions if a breakdown of the flag pattern occurs is advised as a smart business practice.
For more active and risk-tolerant traders willing to take on a short position in Baidu stock, any forthcoming breakdowns below $154.71 could be used to initiate a bearish position. That’s the pattern and 2019 low. Personally, I’d suggest using this week’s low of $158.52 as a short entry. The expectation is this trigger for shorting may prove easier to establish and will be backed by immediate bearish momentum as Baidu moves closer toward and past its mid-February earnings report.
Disclosure: Investment accounts under Christopher Tyler’s management currently own positions in BIDU stock and its derivatives. 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.
