Sunday Edition: Don’t Buy China’s Google Just Yet

June 11, 2017

Sunday Edition: Don’t Buy China’s Google Just Yet

It never fails to make me laugh a bit to myself when I see excitement over a bunch of zeros. Remember Dow 20,000 earlier this year? Or Amazon hitting $1,000 a share last week?

This week it was Google’s parent company, Alphabet (NASDAQ: GOOGL), soaring to trade at $1,006 by late Monday morning which helped push the market cap of the world’s second largest company to $688 billion.

What’s remarkable in my mind is that the demand is still there, even despite all those zeros of the four-digit stock price, as such a high price on an individual stock should make the company look unaffordable to smaller investors.

As that $1,000 price tag is too steep for me, I decided to take a look at China’s answer to Google, Baidu (NASDAQ: BIDU).

Baidu started as a Chinese search engine for websites, images, and audio files. Much like Google, the company has since expanded into many other things including a personal assistant app, a music service, and more recently, a self-driving car platform.

It’s this latest effort that has really peaked my interest. In April, the company announced its autonomous car project, Apollo. The Apollo project will provide an open, reliable, and complete software platform for its partners in the automotive industry so that they can develop their own autonomous driving systems, hardware, and vehicles.

Considering the levels of secrecy in this sector in the U.S., the move by Baidu to open up its self-driving technology is on one level surprising. However, it feels to me like more of an attempt to dominate the car industry with a go-to driverless control system.

By opening up its self-driving designs and technology to local partners, not only will Baidu be promoting the development and popularization of autonomous driving technology, they may also succeed in helping automakers in China corner the self-driving market ahead of western rivals.

But autonomous driving isn’t the only segment Baidu is currently trying to grow. The company also recently began using artificial intelligence applications in the financial services market, and in the healthcare sector where the company launched a medical chatbot last October.

Given all this, you could say that investing in Baidu is like betting on the rise of artificial intelligence, a movement that is expected to change the way we live in the not-so distant future.

Of course my next question was, is now a good time to invest in BIDU? After looking at the chart, my conclusion was “not yet,” and here’s why:

Source: TradingView.

What I’ve marked in the chart above is a contracting triangle, a pattern that typically marks a consolidation before the price resumes the prior trend which in BIDU’s case is down.

This bearish 5 wave pattern is labeled A-B-C-D-E, as marked in pink above. In this pattern, the price bounces between two trend lines, consolidating along the way, until the price breaks out to the downside. For a downside target, you can measure the distance of the base of the triangle (A-B) and measure that distance down from the breakout point. In BIDU’s case, the target is around $80.

Just as with Momo from my article last week, there’s still money to be made on the way down. If you’re an aggressive trader, you could short BIDU or buy put options. Otherwise, keep an eye on BIDU, and if it’s a company you’d like to own, watch for the price to fall to around $80 to buy.

Now, there’s a second scenario where it’s possible that the price in this contracting triangle has consolidated between the lower pink line that you see in the chart above and the blue line, and has already broken out to the upside. If this is the case, then all bearish bets are off, and I would expect the price to start trending up now that the blue trend line has been tested.

If the price does continue up, watch for it to break out above the upper pink trend line to confirm that the first scenario I’ve outlined above is incorrect. An aggressive trader could buy when it does break above that level, but a more conservative investor should wait until the price comes back down to retest the upper pink trend line.

If the price continues down past the blue line in the chart above to again hit the lower pink trend line, then scenario number one is correct. I think this is the more likely of the two scenarios considering that the trend prior to the consolidating triangle was down.

As an example of what this consolidation pattern could look like when it’s complete, let’s look at the chart for crude oil futures as the pattern on its chart is remarkably similar:

Source: TradingView.

Just as with BIDU, on the crude oil futures chart above, we can see a large downtrend followed by a contracting triangle and a continuation of the downtrend. I imagine BIDU will look quite similar when its price completes the consolidation it’s in now.

As always, do your due diligence before making any moves on BIDU. I’ll be sure to do a follow up article on BIDU when it looks like a good time to buy, so keep an eye out for that.

In closing, when market leaders like Baidu begin to turn bearish, it’s a good idea to watch out for other market leaders to turn bearish as well, especially considering how toppy the market is beginning to feel – and if you’ve been reading Sven Carlin’s weekday Investiv Daily articles, you surely have an idea of where the market is headed.

Next week we’ll look at another market leader that could soon be on a downtrend based on technical clues.