How to Trade Best Buy's 10-Year Uneven Downtrend

Shares of Best Buy have been in a downtrend for 10 years, but there have been buying opportunities along the way. Here's how to trade the stock.
By Richard Suttmeier ,

Best Buy (BBY) - Get Report , the retailer of consumer durable products such as TVs and refrigerators, has an 11-quarter earnings winning streak on the line when it reports quarterly results before the opening bell on Thursday. But you wouldn't know it looking at the volatility shown daily and weekly charts.

In the daily chart below, you will observe a strong rally from the end of 2012 to a multiyear high in November 2013. Since this high, the subsequent two highs were lower. The daily chart also shows higher lows. When you observe this type of volatility, top-line earnings-per-share beats have little meaning -- and neither do technical trending signals such as the "golden cross" and "death cross" patterns. Instead, the better technical tools to use are the Fibonacci Retracements from the 2012 low to the 2013 high.

The weekly chart shows the series of lower highs going back to April 2006, and the downtrend to the December 2012 low. On this chart are the Fibonacci Retracements of this downtrend. By analyzing these two charts, investors can learn how to capture the upside moves and avoid the pitfalls of quick corrections.

Analysts expect Best Buy to earn 35 cents a share. On Monday, RBC Capital Markets downgraded the company to sector perform from outperform, with its price target lowered to $36 from $42. Their concern is lower sales of consumer electronics. TheStreet Ratings team rates Best Buy a buy.

Here's the daily chart for Best Buy.


Courtesy of MetaStock Xenith

The daily chart shows that Best Buy had a close of $30.71 on Tuesday, down 17.3% so far in the fourth quarter and down 20.2% year to date, and in bear market territory -- 26% below the multiyear high of $41.48, set on March 17.

The horizontal lines are the Fibonacci Retracements of the rally from the December 2012 low of $11.06 to the multiyear high of Nov. 13, 2014.

A key reason not to be a long-term investor in this stock is the huge price gap lower between Jan. 15, 2014, and Jan. 16 -- down from the 23.6% retracement of $36.32 to the 50% retracement of $27.59. That is a bear market plunge of 24%.

The buy level proved to be the 61.8% retracement of $23.69, which was tested as 2014 began. As 2015 began, the stock was on a tradable rally from this level back up to the 23.6% retracement of $36.32, for a gain of 53%.

As you can see, 2015 was extremely volatile as attempts to stay above the 23.6% retracement continued to fail. The slump of November to date has the stock below the 38.2% retracement of $31.49.

Here's the weekly chart for Best Buy.


Courtesy of MetaStock Xenith

The weekly chart for Best Buy is negative, with the stock below its key weekly moving average of $34.02, but above its 200-week simple moving average of $28.35. The weekly momentum reading is projected to decline to 53.97 this week, down from 63.47 on Nov. 13. Momentum scales from 00.00 to 100.00, with a reading below 20.00 oversold and a reading above 80.00 overbought. A rising reading above 20.0 is positive, while a declining reading below 80.00 is negative. This study is shown in red along the bottom of the chart.

The horizontal lines are the Fibonacci Retracements of the decline from the 2006 high of $58.81 to the December 2012 low of $11.06.

Note how the weekly chart turned positive at the weekly close on Jan. 11, 2013. This buy signal came with the close above the key weekly moving average as the momentum reading was rising above the oversold threshold of 20.00. Looking at the chart, the clear target was the 61.8% retracement of $40.58.

In 2015, the high end of the trading range has been the 61.8% retracement of $40.58, and the low end has been the 38.2% retracement of $29.31.

Investors looking to buy Best Buy should place a good till canceled limit order to buy the stock if its drops to the 200-week simple moving average of $28.35.

Key levels on technical charts of $32.39 and $32.58, in play for the remainder of the year and for November, respectively, are short-term barriers for the stock.

Investors looking to reduce holdings should place a good till canceled limit order to sell the stock if it rises to $37.12, which is a key level on technical charts until the end of 2015.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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