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This Stock Could Be Headed for Disaster

By Jeff Clark
Tuesday, February 9, 2010

By this time tomorrow, we'll know if Baidu (BIDU) – the "Chinese Google" - beat the Street. More importantly, we'll know what the market thinks about it.
 
BIDU reports quarterly earnings after the close today, and most analysts expect the company to beat Wall Street's $1.68-per-share estimate. They also have high hopes BIDU will raise guidance for the coming quarter.
 
Those lofty expectations have set the bar pretty high – maybe too high for the company to hurdle over. BIDU currently trades 73 times this year's earnings estimates and 50 times estimates for next year. So investors are already discounting some fairly remarkable growth.
 
If the company can't lift expectations even higher into the stratosphere, then shareholders may be in for one heck of a tumble.
 
Take a look at BIDU's technical condition...
 
 
 
The stock is stuck in a five-month trading range between $370 and $470 per share, and it's currently trading toward the upper end of that range. The price spike in mid-January happened when Google threatened to pull out of the Chinese search engine market following an alleged "hack-attack" by the Chinese government. Without Google around for competition, BIDU would capture nearly 95% of all the search engine business in China.
 
The stock has held onto those price gains, in spite of significant weakness in the overall stock market. And even the most hardened skeptic has to be impressed with the price action of the shares.
 
But notice the Moving Average Convergence Divergence (MACD) indicator on the lower chart. This momentum-based indicator is failing to hold ground with the stock price. The stock is making new highs while the MACD lags behind. This "negative divergence" is often an early warning sign of an impending change in trend. Traders who are jumping into BIDU ahead of the earnings announcement this afternoon might want to think twice before getting too exposed.
 
There's no doubt BIDU will report great numbers this afternoon. The only question is how much of the good news have investors already priced in to the stock. BIDU is a fundamentally expensive stock with a weak technical pattern. It's not exactly the type of setup that'll pop higher on good news.
 
Bad news, on the other hand, could be a disaster.
 
Best regards and good trading,
 
Jeff Clark




In The Daily Crux
Market Notes
Solar stocks tumble... First Solar, Canadian Solar, and Evergreen Solar slide over 3% yesterday.
 
Mega banks Bank of America, JPMorgan Chase break down to three-month lows.
 
Oil refiners dive... Marathon, Murphy, Tesoro touch six-month lows.
 
Earnings today... Coca-Cola, Coventry Health, Molson Coors, Walt Disney.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 37.77 +1.5% -2.8%
Gold 135.20 -0.1% +13.4%
Silver 27.93 +0.4% +47.9%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 19.39 -9.2% -8.2%
Gold Stocks 564.53 +1.3% +10.6%
10-Year Yield 3.00 +1.4% -9.6%

World ETFs
Symbol Price
Change
52-Wk
USA 122.56 +1.3% +10.2%
Canada 30.44 +1.3% +13.8%
Russia 21.63 +2.3% +16.7%
India 37.73 +1.9% +20.0%
Israel 16.47 +0.9% +9.7%
Japan 10.58 +1.0% +7.4%
Singapore 13.88 +1.0% +19.2%
Taiwan 14.72 +1.6% +17.8%
S. Korea 56.56 +1.7% +22.8%
S. Africa 70.85 +3.9% +22.9%
China 45.06 +1.4% +0.1%
Lat.America 52.82 +1.4% +6.7%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 136.18 +1.5% +14.8%
Big Pharma 64.13 +0.6% -3.3%
Internet 72.13 +0.7% +22.3%
Semis 16.03 +2.1% +28.9%
Utilities 31.21 +0.3% +1.6%
Defense 18.51 +1.3% +10.1%
Nanotech 9.99 +1.3% +0.0%
Alt. Energy 9.95 +1.4% -4.4%
Water 18.31 +1.1% +12.2%
Insurance 16.07 +1.2% +18.3%
Biotech 20.58 +1.1% +27.1%
Retail 19.65 +0.1% +28.4%
Software 24.59 +0.9% +24.1%
Big Tech 53.73 +1.0% +21.9%
Construction 12.99 +2.1% +13.3%
Media 13.57 +1.1% +25.0%
Consumer Svcs 67.26 +0.8% +23.3%
Financials 54.87 +2.4% +5.2%
Health Care 64.22 +0.7% +1.3%
Industrials 63.25 +1.6% +19.7%
Basic Mat 73.57 +1.6% +21.6%
Real Estate 55.24 +1.4% +23.8%
Transportation 91.17 +1.4% +25.6%
Telecom 22.48 +1.1% +17.1%