BIDU charts and progress

The simple fact is there are thousands of assets to trade, while we may see something we like developing, we want the trade to not only come to us on our terms, we want the entry to be good (low for longs/high for shorts), we want the risk to be limited (this is accomplished by letting the trade come to you as just mentioned and what I'll mention next), and we want the probabilities to be high and this is by seeing strong divergences (positive for longs and negative for shorts).

BIDU was a core short recently closed, in fact very close to its low and it has shown some improvement since. While I haven't done a comprehensive study of this thought, I do see signs the market is split or bifurcated and I have mentioned it many times recently. Instead of there being a risk on or risk off environment where most stocks all move in the same direction (relative performance is the only difference), it seems there are stocks that look like they are being sold and some that are being bought, for example: GOOG's chart and underlying trade vs RIMM's chart and underlying trade. RIMM gained about 20% in after hours earnings a day after it was mentioned here as a stock that will probably have some decent upside to it.

The main difference I'm seeing is stocks that have already seen substantial pre-QE3 mark up like AAPL or GOOG are the ones that have the worst looking underlying trade while stocks like RIMM or BIDU that were beat up pretty bad over the last several months or even throughout 2012 are the ones looking like they offer better upside potential.

I suspect this has to do with one of the major differences between former LSAP's (QE1 and QE2) and now (QE3); former LSAPs have seen prices at much lower Price/Earnings multiples (P/E). I never thought P/E would matter again and while BIDU still has a high P/E, price has made it more of a value now than it was in March. During QE1/2 the average dividend yield for the SPX was 4, it's now half that. The average P/E for the SPX component stocks was 10, now its 14.9. As I said, I haven't done an exhaustive study on this, but it seems to me that if there are going to be longs bought, institutions are more concerned with a reasonable valuation now then they have been in many years (before all that mattered was sentiment). I think there's an "air" that the equity markets are in bubble territory (as pointed out last week) and valuations matter when you are at risk of a bubble.

In any case, BIDU isn't the best example of a low P/E, but it has burnt off some of the frothiness from earlier in the year.

Since we saw the pullback coming in BIDU, we've been waiting for accumulation in to a pullback to look at BIDU as a long position, here's how it is coming along.

 BIDU 15 min showing the negative divergence on the right timeframe for a reasonable pullback. I don't expect to see accumulation right away, first the stock needs to be at an area in which it is considered a value.

 The 3 min chart and accumulation and distribution areas, that's the same reversal point as seen on the 15 min chart above, today we saw the start of a positive divergence in BIDU-the start of a positive divergence is just that, it' not necessarily the best place to buy, but it is headed in the right direction, for it to meet all of criteria mentioned above, it needs a bit more work.

 There's some migration from 3 min to the 5 min chart as it starts to lead positive.

 And we see the same including the reversal and the recent positive divergence on the pullback on the 10 min chart.

 The 15 min chart has lost downside momentum, but it's not positive yet. Considering a 15 min chart went negative right before the pullback, I'd like to see at least a positive divergence on the same timeframe.

Which means, it would be most likely and most helpful if BIDU chops laterally a bit and builds that positive divergence, maybe it even pulls back a little more. We have an advantage over Wall Street in that we DON'T have to be in the market all of the time, we can pick and chose our battles, so should BIDU continue with constructive underlying trade and give us a nice entry, low risk and high probabilities, we can take a shot with BIDU long. If BIDU doesn't offer us that edge, there's no reason in the world we have to trade BIDU, it has to come to us and offer us the trade we are looking for, but so far, it looks like it has started so BIDU remains on the radar as a long position to consider as it develops.