Buy the Dip in Chewy Despite Earnings Decline

Chewy is selling off despite better-than-expected earnings. There's a well-defined setup on the chart now for bulls of the stock.
Publish date:

Shares of Chewy  (CHWY) - Get Report were on the verge of breaking out to new all-time highs. That’s not something we say very often in this type of market as the coronavirus has ravaged equity prices over the past month.

However, Chewy,  (AMZN) - Get Report,  (JD) - Get Report and other online e-commerce plays have been outperforming the market as consumer demand rapidly climbs. Despite that climbing demand, shares of Chewy were not able to climb to new highs after reporting fourth-quarter results.

A loss of 15 cents a share beat expectations by 2 cents, while revenue of $1.35 billion grew 35% year over year and was in-line with estimates. The post-earnings decline also came despite significantly better-than-expected EBITDA ($5.85 million vs. estimates calling for a loss of $17.8 million) and management’s first-quarter guidance coming in ahead of Wall Street expectations.

Still, it’s not enough for investors. Granted, the broader market is down on the day but one would have thought after such solid guidance that Chewy would be performing better.

Amazon is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells AMZN? Learn more now.

Trading Chewy Stock

Daily chart of Chewy stock.

Daily chart of Chewy stock.

Resistance had been $35 since Chewy went public last June. In late March, Chewy stock finally broke through this resistance mark with conviction, rallying up toward $40.

Shares peaked several sessions ahead of earnings, pulling back to this prior breakout level ahead of the print. Holding $35 would have been an encouraging post-earnings reaction for the bulls.

Instead, this level failed as support, sending Chewy stock lower. All hope is not lost, though.

For now, prior 2020 resistance at $32 is acting as support, as is the 20-day moving average. Should that observation change though, investors should be aware of more potential downside. In that case, CHWY shares can fall to the $29 to $30 area, where it will find the 50-day and 200-day moving averages.

Should $32 and the 20-day moving average instead hold as support, look for a rebound back up to the $35 mark. If Chewy breaks out over this level again, look to see if shares can rally back toward $40. Above the 2020 high and the all-time high of $41.32 is in play.