Over the last seven to eight months, the Chinese stock market has been on one of the greatest bull runs in history. And that goes for any market around the globe.
Since Oct. 17, 2014, the Shanghai Composite Index is up an incredible 112.2%. An accommodative central bank and an investing public that is clamoring for more are responsible for the tremendous run.
One stock that is not participating in the historic rally is Chinese search engine company Baidu (NASDAQ: BIDU). One month ago, I wrote a bullish piece on Baidu in this same column, and so far that bullish stance has been rewarded with a jump from the $193 area to over $210 just a few days ago. Yes, I was bullish one month ago, but looking at the chart again, I have changed my intermediate outlook for Baidu.
Looking at the daily chart again, I spotted a trend channel that I didn’t catch last month. Now it is pretty clear.
The upper rail of the channel is currently in the $215 range and could come into play within the next few days. Baidu shares have gone from oversold to nearing overbought territory in the last month, which also causes some concern.
Normally I would share a weekly or monthly chart showing other possible support or resistance levels, but today I want to share a different type of chart with you. This is a comparison chart between the Shanghai Composite Index and Baidu since Nov. 11, 2014. That day was the peak we see on the daily chart above. What the comparison chart shows is that the Shanghai Composite is up 101.16%, while Baidu is down 16.31%.
The fact that Baidu isn’t participating in this incredible run in Chinese stocks concerns me. The reason for that concern is this: When a stock doesn’t participate in an upside move like this, many times it will still fall when the market comes down.
Lots of investors are getting worried about China’s market being in a “bubble” phase. They think it is ripe for a correction, especially if the stimulus from the central bank is removed in the fall, if not earlier.
Once the stimulus is taken away, should the Shanghai Composite fall sharply, I think Baidu follows the index down. Given the downward sloped channel, it could be a pretty sizable fall for the stock.
I would look to short Baidu shares in the $210-$215 range, with a stop-loss in the $225 range – above the high from April. As for a target, I think the stock moves down to the $190 range with relative ease. If that gives way, the next layer of support doesn’t come into play until the $150 range.
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