Baidu Stock Is Moments Away from a Powerful Breakout
BIDU STOCK: Fireworks Expected
There is a compelling picture that is currently being painted on the Baidu Inc (ADR) (NASDAQ:BIDU) stock chart, and I have been watching this picture develop with admiration and great anticipation. The picture that is in development has an embedded pattern that is suggesting that a powerful breakout in BIDU stock is now imminent.
The use of price patterns to decipher trends and forecast future prices is based on the workings of technical analysis. This style of investment analysis is a popular method among traders, and I have been polishing my skills within this framework for close to two decades. My view that a prominent breakout is only moments away is based on this style of investment analysis.
This bullish price action consists of impulse waves that advance the price, and consolidation waves that serve to unwind any overbought conditions and set up the next advancing impulse wave. This alternating wave structure is responsible for taking Baidu from a low of $10.05 in December 2008 to a high of $251.99 in November 2014.
The following chart illustrates the big-picture view of the pattern currently being painted on the BIDU stock chart.
Chart courtesy of StockCharts.com
The chart above is a perfect illustration of what bullish price action looks like.
The BIDU share price is currently caught within the confines of a consolidation wave, and a breakout is imminent. The next direction that Baidu stock will take will depend on the direction in which the price exits this wave.
The moving average convergence/divergence (MACD) indicator in the lower panel of the above chart can help shed some light on which direction the price will exit the consolidation pattern. MACD is a simple and effective trend-following momentum indicator. Signal-line crossings are used to distinguish between bullish and bearish momentum.
I have placed a lot of emphasis on this indicator, and for good reason. This indicator has an impeccable track record of identifying what type of wave is set to develop. Whenever a bullish MACD cross was generated, an impulse wave developed, and whenever a bearish MACD cross was generated, a consolidation wave developed. MACD is currently converging, and a bullish cross is only moments away.
A bullish cross would suggest that higher BIDU prices are set to follow, and this price action would coincide with an upward breakout of the consolidation wave. This would suggest that new impulse waves are in development, and that there will be potentially new all-time highs.
The following Baidu stock chart takes a closer look at the consolidation wave and the pattern that is developing within it.
Chart courtesy of StockCharts.com
The pattern that is developing within the consolidation wave is a symmetrical triangle. This pattern contains two converging trend lines; one trend line represents support and the other trend line represents resistance.
These patterns are known to produce especially powerful breakouts because, as the pattern progresses, support and resistance levels outlined by the converging trend lines cause the price to coil into a small confined space. This confinement of space causes momentum to build in anticipation of an eventual breakout.
This chart pattern is why I believe that Baidu is on the verge of a powerful breakout. On average, the price will exit a triangle after the pattern is 70% complete. The chart above illustrates that BIDU stock has fulfilled this criteria and that a breakout is now imminent.
The following Baidu stock chart illustrates the most recent price action that suggests the notion that the price will exit the pattern in an upward direction.
Chart courtesy of StockCharts.com
The same bullish price action that is found on the long-term chart is found here on the short-term daily chart.
Aside from discerning the next direction in the price, this wave structure is also instrumental in producing a potential price objective. The theory behind this wave structure is that the consolidation wave acts as a midpoint and, therefore, the impulse wave that follows the consolidation wave tends to mirror the initial impulse wave in terms of length.
Applying this theory to the wave structure above, it produces a price objective of $192.00. This price objective is outside the confines of the consolidation triangle, suggesting that the pattern will break out in an upward direction.
The golden cross that was generated on February 13, 2017 adds further credence to the suggestion that the price will exit the consolidation pattern in an upward direction.
A golden cross is a bullish signal that is generated when the 50-day moving average, highlighted in blue in the above chart, crosses above the 200-day moving average, highlighted in red. Traders use this signal to confirm that a bull market is play, and it is not uncommon for a price to accelerate shortly after this signal is generated.
Bottom Line on Baidu stock
Baidu stock is on the verge of completing a consolidation pattern, where multiple signals and indicators support the notion that a bullish breakout will follow. The confluence of these indicators and signals also serves to suggest that this breakout will be followed by a substantial run to the upside. Equity markets are surging to new record highs, and this backdrop serves to suggest that BIDU stock has much catching up to do.
