From the desk of Thomas Bruni @BruniCharting
Regardless of how strong their brand may be, Disney continues to remain correlated to the S&P 500, as most stocks do during a bear market, and remains in a downtrend. Despite the neutral to bearish structural picture, the stock looks to be setting up for a tactical bounce in the coming weeks.
Structurally the stock remains range bound between 90 and the all-time highs at 122. During this recent selloff, prices retested the uptrend line from the 2009 lows, which also corresponded with the 38.2% retracement of the 2011-2015 rally. I don’t believe in triple bottoms, and although this is the third time testing the $90 level, current evidence suggests the stock can stage a counter-trend rally before continuing to the downside.
The daily chart provides a more tactical look at the structural range that has developed. On the recent selloff, prices undercut the bottom of the range while momentum diverged positively. If prices can close back above the 90.50-91.50 range outlined in gray, it would confirm the bullish momentum divergence and failed breakdown. The ensuing rally that could develop would likely target the previous support levels of 98 and 105, representing 8.5% and 16% upside from current levels respectively.
The Bottom Line: The weight of evidence suggests the U.S. Equity market may be due for a counter-trend rally. With earnings out of the way and a potential failed breakdown present, Disney may be a stock that offers a favorable risk/reward on the long side in the coming days and weeks.
If prices can close back above the support level outlined in gray (90.50-91.50), a counter-trend rally could take the stock higher toward previous support levels near 98 and 105. This represents 8.5% and 16% upside from current levels respectively.
From a risk management perspective I only want to be long this stock on a close above the bottom of the support range which lies at 90.50. The stock has shown decent relative strength over the past few days and this type of setup offers a high-probability trade opportunity where the risk is well-defined and the risk/reward is elevated.
As always, if you have any questions feel free to reach out and I’ll get back to you as soon as I can. @BruniCharting
JC Here – I agree with Bruni that the weight of the evidence suggests a counter-trend rally is here, and has already started in most places outside the U.S. With that in mind, I think $DIS is a favorable risk vs reward under the circumstances. I would also point to relative strength. While Disney had been a leader for a long time, it has recently gotten crushed relative to S&Ps. This has brought it back down to the uptrend line off the 2011 lows (DIS/SPY). Holding that uptrend line, or recovering after briefly breaking below it, would be a positive in this name and we’d like to see that simultaneously with a bounce in the stock itself.
Tags: $DIS $XLY $DIA $SPY
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This post originally appeared on AllStarCharts.com on 02/12/2016.