Baidu Inc: Internet Stock on the Verge of a Major Breakout
BIDU Stock: The Pattern is Persuasive
I use patterns and technical signals to create my own trading strategies. I follow a set of rules, which keeps my strategies systematic. I love patterns because they act as triggers and provide price objectives, and I can see fairly quickly when a pattern has failed. This is why I chose to focus on Baidu Inc (ADR) (NASDAQ:BIDU) stock. A large distinct trading pattern has emerged and it has serious implications for BIDU stock.
When it comes to pattern recognition, a rule I abide by is that the larger and longer patterns produce similarly large and lengthy reactions. Thus, when I do come across a pattern that fits these criteria, it’s not surprising that I get excited. The pattern in question is a symmetrical triangle, and the stock has been trading with that pattern for the duration of two years. Trading patterns of this size and magnitude imply a high level of volatility. Investors would want to be on the right side of the trade when this pattern completes.
The following chart of BIDU stock illustrates the symmetrical triangle pattern.
Chart courtesy of StockCharts.com
A symmetrical triangle by definition is a consolidation pattern that contains two converging trend lines. Price action determines the pattern and is significant, as each subsequent rally ends at a lower high, because sellers are more willing to exit positions at a lower price, and in each subsequent sell-off buyers are more willing to step in and buy at higher prices.
On average, these patterns are continuation patterns and follow through in the direction of the trend that prevailed prior to the pattern; however, this is not always the case. Symmetrical triangles patterns often have five points of contact before the pattern breaks in either an upward or a downward direction. On average, a breakout usually occurs when the pattern has completed 70% of the triangle. BIDU stock has completely filled this criterion.
The symmetrical triangle resembles a coil, and that is indeed what the trading action is representing. Bulls and bears are fighting, and the line that separates them is getting thinner and thinner. It is only a matter of time before one camp prevails and is victorious.
The following chart illustrates the same pattern, but within a longer time frame.
Chart courtesy of StockCharts.com
The reason I highlighted the current chart is to spotlight the prevailing trend. On average, symmetrical triangles break out in the direction of the prevailing trend. The prevailing trend was up, which suggests that the initial bias for a break is towards the upside.
Symmetrical triangles also provide traders with a price objective. This is done by measuring the furthest width from points 1 and 2. This number is then projected from above or below the breakout. This triangle is approximately $90.00 in width, which represents a substantial move. Current resistance sits at $160.00 and $190.00 as illustrated by the triangle. That gives a target of $280.00 if the pattern breaks higher and a target of $70.00 if the pattern breaks lower.
Bottom Line on BIDU Stock
A symmetrical triangle is a powerful trading pattern. BIDU stock is nearing the completion of this pattern. I will be waiting patiently to see which way the pattern will break. Once the pattern breaks the initial target price will be plus or minus the breakout point. The pattern represents a great opportunity for those who are on the right side of the trade. If the share price re-enters the triangle after a break, it will be reason for concern: the pattern may be failing.
