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What’s Next for Baidu.com (BIDU)?
05/03/2010 10:54 am EST
Even if you don’t trade Baidu.com (BIDU), then you might still be aware of the large earnings gap that sent the stock surging $80.00 (13%) higher last Thursday, only to give back some of those gains with a bearish engulfing candle on Friday.
Let’s take a quick look at the last three gaps in BIDU stock and try to assess how that plays into the current large gap.
Let’s take the past three major gaps in order, starting in October 2009.
On October 27, price plunged in a down gap $80.00 (18.5%) lower, only to recover $30.00 (8%) by the end of the day on which the gap occurred. Volume peaked over 10,000,000 shares on the session. BIDU stock completely filled the gap 15 days later on November 11.
The next major gap was January 13, 2010, which sent the stock surging higher this time, rising $56.00 (14.5%) with price closing near the open. Volume surged higher to 12,000,000 shares traded that day.
The next day, price continued the surge, forcing all those who took a short-sale position (in anticipation of a gap fill) to cover painfully in a short squeeze that took price up $24.00 (5%).
Not to be outdone, the stock (sellers) then took over, sending the stock down to the $400.00-per-share level (as initially expected—most traders expect gaps to fill).
However, as you see, this still fell $20.00 shy of a full gap fill, and the stock continued its rally higher, breaking out on another upside gap (with no pullback at all) on February 10.
All of that brings us to the current gap. Due to positive earnings, price leaped $80.00 (13%) higher, but on far less volume than the prior three gaps. Volume came in at 3,700,000 shares—66% lower than the prior two gaps (and even lower than the mid-February gap that reached over five million shares).
What Does the Past Hint for the Future?
Classic technical analysis would state that we need volume (participation) to fuel a rally higher, so the lower volume number is a glaring non-confirmation and bearish omen.
Also, the clean doji candle that formed on Thursday was followed by a bearish engulfing strong sell candle that took price down $21.00 (3%). That’s not what bulls want to see.
Based on volume, the reversal candles, and the past three gaps, odds seem to favor (though never guarantee) a downward move to the $650.00 level at a minimum, but as always, it pays to watch price day by day instead of walking up, buying a put option (or shorting shares), and walking away.
Let’s keep watching to see the outcome of this large (but not unusual, by historical standards) gap that formed last week.
By Corey Rosenbloom of Afraid to Trade