control vast stretches of the search-engine universe and, despite inroads from not-so-young upstart
, they will retain their industry dominance for years to come. So, which of these two behemoths will
in the next 12 to 18 months?
There's little argument that Baidu has a major advantage, because it operates in a state-run society than can and will limit competition, as we saw with the Google-censorship fiasco earlier this year. It will also benefit from China's red-hot economy, as opposed to Google's U.S.A., which apparently needs the
expected second round of quantitative easing in order to wake up from the dead.
However, Google is clearly on the comeback trail after having blown away third-quarter earnings estimates in its Oct. 14 release. The company surprised analysts at that time with excellent performance in core operations, as well as unexpected growth in non-core operations, including their display and mobile units.
Baidu's current price, near $112, is a big draw for smaller investment accounts that can't find a home for a $600 stock such as Google. There were definite advantages for the company when they implemented a 10-for-1 stock split May 12, including a one-day 8% rally at the same time that the rest of the world was reeling from the after-effects of the flash crash.
While basic fundamentals and world positioning favor Baidu over Google, this is a technical column, and I've yet to talk about the price charts. Both stocks have lifted to multi-month highs in recent weeks, but one stands out as the clear leader from a technical perspective. Let's review both price patterns and then compare the results.
Google came public near $100 in September 2004 and entered a strong uptrend that lifted shares above $700 by November 2007. The stock topped out at $747 at that time, carved out a double-top pattern (see red lines in the chart above), and broke down in January 2008. The subsequent decline continued for nearly a year, dropping the stock to a two-year low at $247, where it bottomed out.
The post-bear-market recovery ended in January of this year at $629, or more than 100 points under the historic high struck in 2007. The stock turned lower from that level and spent the spring and summer testing support between $430 and $450. It bounced with the broad market in August and then went vertical after earnings two weeks ago.
The huge earnings gap lifted the stock above April resistance at $598 and round-number resistance at $600. The rally has continued in a steady fashion, and the price is now pulling into even stronger resistance at the January high. That level will likely mark the end point for short-term gains ahead of a consolidation period that might last into early 2011.
The stock will need that period of base-building in order to support a continued uptrend that eventually reaches and tests the 2007 high. In the meantime, the large unfilled gap between $548 and $591 (red lines) will offer an attractive target for short sellers, as it has done in the past. Look back at analogous price action in April 2008, and you'll see what I'm talking about.
The stock rallied out of a four-month downtrend following its first-quarter earnings report that year, leaving a huge gap between $457 and $528. For another few weeks the uptrend continued at the same angle of attack as that of the current rally, with the stock stalling out at the start of May and then rolling over, filling the gap just two months later. This "gap-magnet" dynamic could take control of Google's price action once again.
Baidu hit the U.S. exchanges just 11 months after the Google initial public offering, opening around $6.50 on a pre-split basis. It chopped sideways in a broad range (red lines) until June 2007, at which point it broke above the high posted in its second week of public activity. The uptrend then took off like a rocket, hitting $43 in November 2007 and topping out with other world markets.
The bear market dropped the stock back into its first-year range, where it bottomed out in November 2008. The subsequent recovery began with a steady uptick that returned shares to the 2007 high in October 2009 (blue line). The stock ground sideways into February of this year and then went vertical, more than doubling in price in the last eight months.
The rally since February shows three major consolidation patterns (black boxes). In July it broke the first one -- a triangle between $62 and $82 -- and spiked up to $88, where it ground out a small-scale cup-and-handle pattern that broke to the upside in September. That rally yielded the third sideways pattern, a symmetrical triangle across round-number resistance at $100. The stock entered a new uptrend after last week's strong earnings report.
Although Baidu looks overbought by nearly every technical measurement, the three periods of sideways action have stabilized the uptrend, leaving behind many zones of support if there's a major downturn. More likely, however, this year's strong uptrend will continue well in 2011, and will perhaps bring the stock as high at $140.
The bottom line: Right now, Baidu is a better stock to own than Google from almost every technical angle. Most important, if Google sells off there's no real support until it fills the gap under $550. Of course, that would be a long and painful trip for shareholders. On the other hand, Baidu has proven in recent weeks that it can hold above triple digits. This predicts that a downturn will find support near $100, or just 12 points under the current price.
Alan Farley provides daily stock picks and commentary with his "Daily Swing Trade" newsletter.
At the time of publication, Farley had no positions in the stocks mentioned, although holdings can change at any time.
Alan Farley is a private trader and publisher of
Hard Right Edge
, a comprehensive resource for trader education, technical analysis, and short-term trading techniques. He is also the author of
, a premium product from TheStreet.com that outlines his charts and analysis. Farley has also been featured in
. He has written two books:
, due out in April. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.
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