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Baidu's Momentum Story


These meteoric moves seem overdone - they resemble Roman candles ready to flame out...

Her name is Aphrodite and she rides a crimson shell,
And you know you cannot leave her for you touched the distant sands
With tales of brave Ulysses; how his naked ears were tortured
By the sirens sweetly singing.

-Eric Clapton (Tales of Brave Ulysses)

"By their own follies they perished, the fools."

-Homer (The Odyssey)

As a hedge fund buddy of mine said on Monday, "The siren song of It's So Easy is in full swing."

The momentum road map seems like such an easy road map – until it isn't.

In 1999, I remember hearing one of the true legends of the hedge fund universe comment that "the big fools are watching while the little fools are dancing." This gentleman was of course correct, but not before his tenacity and resolve were tested. It's good to have Time on your side. Which brings me to this– did I actually hear a self-proclaimed financial "televangelista" proclaim that if you go against the fundamentals you'll get crushed? So that's what the recent move in the likes of (BIDU) is all about– fundamentals? Now I'm clear.

In other words, between last Wednesday, when BIDU closed at 157.14, and Monday, when the stock closed at 186.30, there was a "change in fundamentals," a "grand realization," a "big aahhaa"?

In other words, 30 points in three days were because of the change in the company, a change in the underlying fundamentals of the company? Perhaps someone should let the CEO in on the change within that bred the change without.

From where I sit, BIDU looks like pure momentum for the sake of pure momentum.

One fund that I consult with asked what I thought the move within BIDU was about. It's easy enough to say that it's a short squeeze (and there are obviously some shorts), but the short covering probably started in the 150s. Saying it was purely short covering would be a pure cliché. No, Monday's roll in BIDU on the heels of Thursday and Friday's shake and rattle is about someone pressing the case and chasing the stock. Why? Because they can. Because they've got the pure power, the money, to do so. They know what happens when you light a fire under a breakout that is already in ascent – you get a meteoric move.

I often say that the market many times plays out in threes – on all time frames – sort of a "wham, bam, thank you ma'am".

Note the extension in the last three weekly bars on BIDU, and how they are a fractal of the extension of the last three daily bars on the stock, which in turn are a fractal of the extension on the hourly bars on the stock. So, has BIDU seen a buying climax – in the short run at least?

A look at the Square of Nine Calculator shows that at 185/186, BIDU is up 720 degrees from this year's $93.00 low.

Momentum begets momentum. Let's not make this thing any more difficult than it is. Let's not confuse momentum with value. Can't we just all get along and call a spade a spade? Let's not try to rationalize the fundamentals of the company through the price action of their stock. Wall Street has a nasty habit of going to excess, both on the upside and the downside. There are great companies and there are great stocks. Sometimes the two don't meet. There are great fundamentals and there are great trading vehicles. Often they have nothing to do with each other.

Sometimes these meteoric moves attract short sellers like flypaper attracts flies and a light bulb attracts moths. Why? Because sometimes the higher a stock goes, it seems the more juice there is on the downside. These meteoric moves seem overdone – they resemble Roman candles ready to flame out. And many times they do, but, again, it's good to have Time on your side.

The biggest question for a trader is "Why fight the move? Are you an obsessive short seller?" It seems to me that if the characters in Dumb and Dumber were traders, no doubt they would be observing the sheer beauty and power of the BIDU move, and jumping on the band wagon. They would have been seduced. Are you afraid of looking like a little fool dancing, and being judged by the big fools for not having a reason to go along with the momentum?

The important thing to remember is that speculation is observation, pure and experiential. Thinking isn't necessary and many times just gets in the way.

Speculation and momentum trading entails dating stocks– as opposed to falling in love and getting married to them.

Conclusion: In yesterday's column I mentioned that I would not discount the possibility of a new high if the 20-day moving average on the S&P was convincingly recaptured. The sling-shot action in the S&P futures from down meaningfully on Sunday night to up substantially on Monday morning: looks like the hook was set. Moreover, the bulls had the wind at their back with Paulson's serendipitous comments about the "real estate market bottoming." Consequently, the S&P huffed and puffed to blow down the door at the 50/20-day moving averages, and the threshold at 1511.

In my work, if there is going to be a leg up to a new high in the S&P, this is where it begins. Only a move now below 1501 would derail Monday's momentum, and the Picture Perfect Pattern of my setup for a new high into mid-month. (See yesterday's column.)

However, that being said, because this is a holiday shortened week, heads up for a potential first hour high that sees subsequent weakness on Tuesday.
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