Last time we wrote the “Technical Analysis” column here, we talked about a similar trade involving SPX and VIX. It ended up being a good call as the SPX moved big the very next day.
This time, we are looking at BAIDU (the NASDAQ-listed chinese web services company), which seems to be creating a topping pattern for the last few days. The Bollinger Bandwidth seems to indicate that it is close to a big move… the problem is always figuring out the direction (up or down). Our hunch (and obviously, some other indicators like MACD and CCI) seems to point down.
Last time the Bollinger Bandwidth was this low (indicating a big move was on its way) was back in April, right before BAIDU went up almost 10% in a few days. This time, if the stars are aligned, we might be looking at a similar move, but down.
The stock is at around 139 as we type, hence we’ve purchased some September 130 puts to test our “luck”, looking at a target price of 125 in a few days (possibly weeks) for a quick profit (risk/reward is 1:5). Just in case we’re wrong, we have a “stop” (sell the puts) at around 143.
Update (Sep 10th): The indicators we use have completely changed direction (see Chart 2 under Chart 1) and the stock broke higher, hence we sold the puts and bought calls as of today. It’s ok to admit a “change of heart”. We believe BIDU stock can go further higher within the next week or two. Like we’ve said earlier, we knew the stock was going to move big, but our indicators were a little early on the direction… it seems now that the direction is clearly up.