A Rally in Baidu

 | Oct 05, 2012 | 11:15 AM EDT
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Is this a two-step pattern or the beginning of a new rally? Now that I've asked the question, I'm going to tell you that I cannot answer it just yet, but I do have some trading parameters for you.

Baidu (BIDU)
Source: Dynamic Trader

I recently saw what I call a two-step pattern in Baidu (BIDU) and as there was what we call a "zigzag" into a rather healthy price cluster of resistance on the way up at the $117.15 to $118.18 area. Frankly, I thought BIDU was going to blow through this zone as we saw a very strong close INTO this resistance. Coincidentally, there was a downgrade, I believe, in Monday's session that caused this stock to tumble from this key price decision. (Funny how the fundamentals sometimes coordinate nicely with the technicals.)

Typically, my price target for a two-step pattern setup is the 1.272 extension of the full zigzag pattern, which came in below the market at the $103.72 area. Within the context of a zigzag pattern, however, it actually creates an important decision or hurdle on the flip side. The support decision that came in was at the $110.65 to $82 area, which included the 100% projection of the prior swing (Sept. 17 high to the Sept. 21 low projected from the Sept. 28 high), along with the .618 retracement of the Sept. 12 low to the Sept. 28 high. Price ended up testing this support area making a low at $110.88 area. That's when we had to watch this zone for our next decision. A hold above it would tell us that the decline might be terminating. A violation of this same key zone would have suggested that the two-step pattern would have continued down towards the $103 target. Since the $110.88 low was made, we have seen a couple of buy triggers suggesting that you can place a bet on the buy side since we did continue to hold above it. There's an example of such a trigger on the 30-minute chart below.

Baidu (BIDU) -- 30-Minute
Source: Dynamic Trader

You can see where we took out a prior swing high, where we also had a moving average crossover to the upside and we saw what they call a TTM squeeze trigger. So what do we do with this? You can now consider the buy side of BIDU on a pullback with your risk defined below the most recent low made at $110.88. The potential upside targets on BIDU come in at $118.92, $121.11 and $127.43.

The big lift this morning's unemployment figures gave BIDU weren't expected (up 2.5% to $116 mid-morning), therefore, I have calculated some pullback zones that can now be considered for an entry on a pullback. The zone comes in between $113.70 to $115.10. This is illustrated on the updated chart below:

Baidu (BIDU) -- 15-Minute
Source: Dynamic Trader

The risk/reward is decent. I will exit my vertical call spread if it violates $110.88, when I would consider this a trade gone bad.

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

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