The chart is now in wave 4 to the downside within two degrees of uptrend: waves 5 {+1} and 5 {+2}. Wave 2 began on Nov. 26, so if the decline is proportional, it will last into the new year.
BIDU shares lost 5.8% over the seven-day life of the position, or negative 300.5% annualized. The options spreads produced an 11.9% loss on risk, or negative 622.3% annualized.
At the time I closed, the odds of the short leg of the spreads expiring out of the money had declined to less than even, at 44%.
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Update 12/10/2013: I've opened a bull put spread on BIDU, short the $165 puts and long the $155 puts, with 1.7:1 leverage and a maximum potential yield at expiration of 12.9%. The position provides a 10.1% hedge of profitability below the entry price.
Options modeling gives the short leg of the spread a 75% chance of expiring out of the money for maximum profit, making this a high-probability trade.
Baidu Inc. (BIDU) is nearing the end of its spectacular rise from $4.44 on Feb. 6, 2006. Today it hit a high (so far) of $179.71, which is 40 times the price when the long-running uptrend began.
The Elliott wave count shows BIDU in the fifth wave of that uptrend, and at a lower degree, within the fifth wave of its rise from $82.98 last April 5.
At the lowest degree that I've counted, BIDU is in the third wave of an uptrend that began Nov. 7 from $142.70.
Click on chart to expand.
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| BIDU 8 years weekly bars (left), 1 year daily bars (center), 81 days hourly bars (right) |
Third waves can carry quite a distance. They are phenomena of hopes and dreams, of get on the bandwagon before it pulls out.
BIDU is in blue-sky territory, recording all time highs every time it eclipses a prior peak. It has already exceeded wave 1 in length, so there is no rule that limits its rise before it turns toward its wave 4 correction to the downside.
The trend channel on the right-hand chart suggests $184 or better a potential targets, a 2.2% rise. But I don't put much stock in that, having seen prices dance along their trend channel boundaries to quite unexpected extremes.
Nor am I saying that BIDU will rise forever. The markets will work their collective will, and the price could turn tomorrow or months away.
In terms of duration, wave 1 lasted for a couple of weeks, and wave 3 has already been in progress for a bit more than that. Although there are no rules that forbid a third wave from enduring much longer than its first-wave cousin, I assume, quite reasonably, that three months before the turn would be too long long a term for normal expectations, and tomorrow would be too short.
Monday's break above the 20-day price channel was BIDU's fifth bull signal since wave 5 {+2} began on April 5. The four completed signals split evenly, with the two winners yielding 17.2% and the losers losing 5%. The resulting 12.2% win/lose yield spread is quite impressive enough to draw my interest.
Baidu, headquartered in Beijing, is China's Google, with an immense presence in the country's online universe.
Search advertising accounts for 52% of its market cap, compared to 65% for Google. Like its American analog, Baidu has branched out far beyond search to include media files, news and images.
Analysts are positive about Baidu's prospects, collectively coming down with a 33% positive enthusiasm rating.
And no wonder, with a 34% return on equity and debt at 49% of equity, relatively small when compared to the ROE, Baidu clearly has the resources and momentum to dominate the world's largest Internet market.
Baidu's earnings tend to peak in the third quarter, with 2013 coming in ahead of its year-ago counterpart, and 2012 beating out its year-ago quarter as well.
The company has surprised to the downside three times in the last three years, one being in the most recently quarter. It has surprised to the upside nine times, including in the quarter before the most recent.
Baidu's earnings yield is 2.74%, less than 68% of other computer-services companies. It pays no dividend; all earnings are retained within the company. The stock is priced at 36 times earnings.
The stock's premium compared to sales is at speculative levels. It takes $13.98 in shares to control a dollar in sales.
Institutions own 81% of shares.
BIDU on average trades 3.1 million shares a day and supports a wide selection of option strike prices spaced $5 apart near the money. The front-month at-the-money bid/ask spread on calls is quite narrow, at 3.1%.
Implied volatility stands at 39% and has been on the rise since Nov. 27. Volatility stands at its peak for the month, suggesting that short positions, such as bull put spreads, would produce the best results.
Options are pricing in confidence that 68.2% of trades will fall between $160.12 and $201.10 over the next month, for a potential gain or loss of 11.3%, and between $170.77 and $190.45 over the next week.
Contracts today are trading actively, with puts at a bit more than six times their five-day average volume and calls at more than five times average.
Baidu next publishes earnings on Jan. 31.
Decision for my account: It's a good chart and excellent financials. I'm generally happy to have some China exposure in my portfolio. There are risks, but in terms of narrative, I think they're outweighed by the promise.
I intend to open a bull position in BIDU if upside momentum continues into the half hour before the closing bell. I'll structure the position as a bull put spread, sold for credit and expiring in January.
References
My shorter-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.
I use the number 68.2% in using applied volatility to calculate the expected trading range. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.
Elliott wave analysis tracks patterns in price movements. The principal practitioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading.
Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.
See my post "Chart Analysis: Nomenclature" for an explanation of my method for labeling waves on the chart.
By preference I place my trades in the last half hour before the closing bell in New York. See my essay "When is the best time to trade" for a discussion of the practice.
Disclaimer
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.
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