Cracking Baidu

 | Jan 04, 2013 | 8:30 AM EST
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In late November, I started watching for a bottom to develop in Baidu (BIDU), given a number of time and price parameters that suggested a termination in the stock's decline.

Since then, the stock has made a relatively important low, and it's seen a nice corrective rally that amounts to $17.50 so far. I still believe Baidu has some upside potential -- because, as you can see on the weekly chart below, some of the prior rally swings have amounted to anywhere between $35 and $51.82.

Baidu (BIDU) -- Weekly
Source: Dynamic Trader

But if you did not get in at lower levels, where the risk was extremely well defined, what can you do now? You certainly don't want to buy at the current price -- if you did, your risk would go all the way down below the $89.40 swing low!

What we can do at this point is to create a new trade setup in the direction of the bigger-picture trend. Let's take it down to a 60-minute chart, and I'll give you some levels you can consider for entry. I will also define your risk.

Baidu (BIDU) -- 60-Minute Chart
Source: Dynamic Trader

On the chart above, I consider the bullish pattern intact as long as the price continues to hold above the Dec. 31 swing low of $97.50 swing low. What I want to do here is to focus on any key support decisions that come in above this key low, so I've run multiple Fibonacci price relationships -- and have identified a possible value area between $100.23 and 102.79. If Baidu retreats near this area in this next session or so, this is where you want to be a buyer. Your risk would be defined below the $97.50 swing low, so that's where some traders would place a stop.

You may prefer simply to do this. But, for myself, I will use a lower-time-frame chart -- such as a 5-minute chart -- for a trigger to suggest that the decline is actually terminating around that key zone. I find that using triggers helps to filter me out of quite a few bad trade entries.

But, as always, if the $97.50 swing low is taken out, I will back off the buy side until the next trade setup develops.

 For more information on trades and triggers, please refer here.

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