How to Trade the Disney Stock Roller Coaster

Shares of Disney crashed 26.3% between Aug. 4 and Aug. 24; the stock is up 28.4% since then. Here's how to trade the roller coaster stock.
By Richard Suttmeier ,

Entertainment and media giant Disney (DIS) - Get Report , an important component of the Dow Jones Industrial Average I:DJI , has seen its shares ride a roller coaster in the past quarter. Here's how to trade the volatile stock going into its earnings report on Thursday after the market closes.

Disney had strong upward momentum that abruptly ended in a negative reaction to earnings reported on Aug. 4. The stock set its all-time that day, then spiraled lower, setting the low for the move during the flash crash open on "Black Monday," Aug. 24.

The stock had a choppy recovery before regaining upward momentum as the fourth quarter began. Investors should observe the volatility shown on daily and weekly charts, as both have important Fibonacci Retracement levels.

What's interesting is that the Dow 30 ended Tuesday up 10% so far in the fourth quarter and up 0.5% year to date, with a high to low decline of 16.2%. While this occurred, shares of Disney outperformed, despite a bear market plunge of 26.3% between the high and low of August. Disney is up 13.1% so far in the fourth quarter and up 22.7% year to date.

Analysts expect Disney to earn $1.17 a share. Some estimates are a bit lower at $1.14 a share, but revenue is expected to show a healthy rise from the year-ago quarter. TheStreet Ratings gives Disney a buy rating.

Here's the daily chart for Disney.


Courtesy of MetaStock Xenith

The daily chart shows that Disney had a close of $115.54 on Tuesday, up 13.1% so far in the fourth quarter and up 22.7% year to date.

The stock began 2015 above a "golden cross" that was confirmed on Jan. 31, 2012, when the stock closed at $38.90. A "golden cross" occurs when the 50-day simple moving average rises above the 200-day simple moving average, indicating that higher prices lie ahead. The 200-day simple moving average was tested in November 2012 and again in October 2014, setting the stage for more gains in 2015.

A positive reaction to earnings reported on Feb. 3 resulted in a price gap higher the next day. The stock declined the day after the earnings report, on May 5, and weakness held the 50-day simple moving average. The huge surprise occurred following the last earnings report, released on Aug. 4

A plunge of 26.2% began from the all-time high of $112.08 set on Aug. 4. The price gap lower on Aug. 5 was also below the 50-day simple moving average. This downside volatility had Disney vulnerable to China-led flash crash on "Black Monday," Aug. 24. Since the low that day of $90.00, the stock consolidated between the 23.6% Fibonacci Retracement of this decline at $97.52 and the 50% retracement of $105.99. This changed as the fourth quarter began and the stock surged 28.4% to Tuesday's close.

Here's the weekly chart for Disney.


Courtesy of MetaStock Xenith

The weekly chart for Disney is positive, with the stock above its key weekly moving average of $109.72 and well above its 200-week simple moving average of $74.27. The weekly momentum reading is projected to rise to 66.88 this week, up from 56.63 on Oct. 30. 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 Fibonacci Retracements are between the March 2009 low and the August 2015 high. Investors looking to the low end of a trading range consider that to be the 23.6% retracement of $96.79.

Investors looking to buy Disney should place a good till canceled limit order to buy the stock if its drops to the 23.6% retracement of $97.52.

Investors looking to reduce holdings should place a good till canceled limit order to sell the stock if it rises to $124.15, which is a key level on technical charts until the end of 2015.

There's a key level of $115.86 that was crossed as Disney traded as high as $116.40. This level remains in play for the remainder of November.

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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