Best Buy Shares Drop but Hold Value Levels - Here Are the Trades

The charts say investors should buy Best Buy on weakness to the annual and quarterly value levels at $79.03 and $78.70, respectively, and reduce holdings on strength to its monthly risky level at $90.39.
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Best Buy  (BBY) - Get Report beat fourth-quarter-earnings estimates and the stock has wavered on a day when coronavirus concern is roiling the broad market.

What's critical for investors in the Richfield, Minn., electronics retailer is that on the charts, key price levels have held. 

The stock traded as low as $78 at the open but stabilized and traded higher after holding its annual and quarterly value levels at $79.03 and $78.70, respectively. At last check it was trading a bit above $80.

Best Buy for Dec. 9 through 20 instituted a holiday-themed sales campaign called “12 Days of Deals." This doorbuster promotion focused on electronics from Apple  (AAPL) - Get Report, Samsung  (SSNLF) , Microsoft  (MSFT) - Get Report and Google  (GOOGL) - Get Report. This strategy paid off in a big way given today’s solid earnings report.

The retailer projects solid profit for fiscal 2021 and called the coronavirus a “fluid situation.” Here’s the analysis of the earnings report as compiled by TheStreet.com.

At Thursday’s low of $78, the stock was down 11% year to date. Going back to its Dec. 24, 2018, low of $47.72 the stock is up a bull-market 64%. 

The stock this morning was in correction territory 15% below its all-time intraday high of $91.99, set Feb. 20, just a week ago.

Before this bull run, the stock had a bear-market decline of 43% from its August 22, 2018, high of $84.37 to its Dec. 24 low of $47.72.

The retailer is reasonably priced, with a p/e multiple of 13.76 and a dividend yield of 2.44%, according to Macrotrends.

The Daily Chart for Best Buy

Daily Chart For Best Buy

Daily Chart For Best Buy

Courtesy of Refinitiv XENITH

The daily chart for Best Buy shows the rally since the Dec. 24, 2018, low. 

The stock has been above a golden cross since April 25, 2019, when the 50-day simple moving average rose above the 200-day simple moving average. This indicated that higher prices would follow. Under this buy signal investors should buy weakness to the 200-day simple moving average. 

The moving average was a magnet between May 10 and Oct. 10 as a buying opportunity. This signal almost ended on Oct. 15, but the stock stayed above its 200-day SMA.

The close of $87.80 on Dec. 31 was an important input to my analytics. The stock held its annual and quarterly value levels at $79.03 and $78.70 post-earnings today. The semiannual risky level is above the chart at $97.06.

The close of $84.69 on Jan. 31 was an input to my analytics and its monthly risky level at $90.34 failed to hold on Feb. 21.

The Weekly Chart for Best Buy

Weekly Chart For Best Buy

Weekly Chart For Best Buy

Courtesy of Refinitiv XENITH

The weekly chart for Best Buy will be downgraded to negative this week given a close on Friday below its five-week modified moving average of $86.45. 

The stock is well above its 200-week simple moving average, or reversion to the mean, at $61.25. That was last tested as a buying opportunity during the week of Dec. 28, 2018, when the average was $49.30.

The 12x3x3 weekly slow stochastic reading is projected to end the week declining to 78.58, falling below the overbought threshold of 80. 

At the Dec. 24, 2018, low, this reading was 7.43, well below 10, as the stock became too cheap to ignore.

During the week of Jan. 24 this reading was above 90, putting the stock in an inflating parabolic bubble formation. This bubble has popped.

Trading Strategy: Buy weakness to the annual and quarterly value levels at $79.03 and $78.70, respectively, and reduce holdings on strength to its monthly risky level at $90.39. 

How to use my value levels and risky levels:

The closes on Dec. 31, 2019, were inputs to my proprietary analytics. Quarterly, semiannual and annual levels remain on the charts. Each uses the past nine closes in these time horizons.

Monthly levels for February were established based upon the Jan. 31 closes.

New weekly levels are calculated after the end of each week.

New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. Annual levels are in play all year long.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in.

To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.

How to use 12x3x3 Weekly Slow Stochastic Readings:

My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the past 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold.

A reading above 90.00 is considered an “inflating parabolic bubble” formation that is typically followed by a decline of 10% to 20% over the next three to five months.

A reading below 10.00 is considered as being “too cheap to ignore” which typically is followed by gains of 10% to 20% over the next three to five months.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.