In search of a rebound
05/23/18

It was the best of times, it was the worst of times.

Roughly 48 hours after a 4.5% up day that took its stock to an all-time high around $284, leading Chinese search engine company Baidu (BIDU) announced on May 18 that Chief Operating Officer Lu Qi was stepping down. The stock fell 9.5% that day and tacked on a 5% loss on Monday, dropping its shares to below $240 before they stabilized a bit yesterday:

Baidu (BIDU), 12/19/17 – 5/22/18. Big dipper. Baidu (BIDU) daily price chart.

Source: OptionsHouse


If this move and BIDU’s January-February and March-April 20%-plus declines weren’t enough to convince someone of the stock’s penchant for making chart-busting swings, the weekly chart below may clinch it. The stock has gained more than 2,000% since January 2009, but it has also gone through multiyear “consolidations” that featured dramatic price swings.
Baidu (BIDU), 10/23/06 – 5/22/18. Runs and ranges

Source: OptionsHouse


But let’s circle back to the action on the corporate side. Referring to Baidu as a “Chinese search engine company” may be a little misleading, since, like Alphabet/Google (the company it’s most often compared to), Baidu has embarked on a long-term plan to leverage its search-engine dominance into artificial intelligence (AI)-driven tech ventures.

But those broad ambitions were precisely what was supposedly imperiled by the departure of Qi, a former Microsoft executive who was brought on board in late 2016 to oversee the firm’s move into AI. Vice President Wang Haifeng has been tapped to take over the company’s AI initiatives (Qi will remain Vice Chairman of Baidu).1

No one likes to see unexpected shake-ups in the corporate suite, but some traders and investors may be wondering whether the recent sell-off is justified in light of Baidu’s big picture. Although it has seen the share of its bread-and-butter search traffic shrink slightly (and perhaps temporarily?), Baidu remains the undisputed leader in its market, handling more than 70% of searches in China.2 Its closest rival, Shenma (owned by Chinese e-commerce leader Alibaba), checks in with less than 17%:

Percentage of Chinese search engine market, May 2014 – May 2018

Source: StatsCounter GlobalStats


BIDU’s recent down move could certainly be described as overdone, based on its rarity. The stock shed more than 15% in the three days from May 16 (its record-high day) to May 21, and it has experienced only six other declines of this magnitude from a five-day (or longer) high.

Two ways of looking at the down move, however, hint at the possibility of a short-term rebound. The first pattern is three days of lower lows and closes after the stock makes a five-day (or longer) high; the second is a day that makes a 10-day low three days after a five-day (or longer) high. Both accurately describe the May 16-21 price move. The first pattern occurred 28 previous times, the second 27 times. In both cases, BIDU tended to move higher for the next two to five days; the price action over the next five days was more mixed.

Monday’s low will likely loom large in the near-term action. BIDU shares held above that threshold yesterday, although they gave back almost all of their intraday gains. Veteran traders may not be surprised to see prices drop below it briefly, but a close (or closes) well below it could open the door to a challenge of the stock’s February and April lows around $210.

At that level, a new herd of potentially longer-term bulls may be sniffing around the pasture.

Market Mover Update: Micron Technology (MU) shares got another shot in the arm when the company announced after Monday’s close that it was entering a deal with Intel (INTC) to produce its next generation of flash drive and digital camera semiconductor chips, and was also buying back $10 billion of its shares. The stock rallied more than 9% intraday on Tuesday after a 3.9% gain on Monday.

 

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1 Reuters. China's Baidu says COO to step down. 5/18/18.

2 StatsCounter GlobalStats. Search Engine Market Share China. 5/22/18.