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Best Buy Stock Tests Breakout Range - Here's How to Trade It

Best Buy stock is testing a breakout range. Here's how to trade the consumer-electronics retail icon.

Best Buy  (BBY) - Get Best Buy Co., Inc. Report is emerging as one of the retail-sector winners from the covid-19 pandemic.

The electronics chain this week is in rally mode, surging 11% Monday on a pair of price-target hikes, from Telsey and UBS. 

Telsey raised Best Buy to outperform, putting a $90 price target on the shares, while UBS boosted its target to $80 from $74 and affirmed a neutral rating.

The boosts come ahead of Best Buy’s first-quarter-earnings call tomorrow. Wall Street as surveyed by FactSet is expecting earnings per share of 41 cents, or an adjusted 49 cents. The adjusted number would be half the figure Best Buy reported a year earlier.

Now, investors are betting that Best Buy does less bad than expected.

With most consumers stuck at home, Best Buy at this point appears to have seen resilient sales. Maybe more important from an investment standpoint, this stock is working right now.

Best Buy is up 14% in the past six months from a total-return standpoint, versus a 4.8% decline in the S&P 500. That relative performance matters more than many investors realize right now.

Simple as it seems, buying what’s working is a sound strategy during crisis-market environments.

A look back at prior crisis-investing environments over the past 3 1/2 decades shows that stocks that have positive six-month relative strength saw a 78.4% chance of a positive one-month forward return.

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That’s about a 50% higher future win rate than the average S&P 500 stock.

To figure out how to trade Best Buy here, we’re turning to the chart for a technical look.

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The strength of Best Buy’s rebound since mid-March has been extraordinary. The shares are back within 8% of all-time highs as of this writing. That's after Monday’s 11% surge sent Best Buy breaking above the technically important $80 price level, which for about a month had been resistance for the shares.

Long-term resistance at $90, just below all-time highs of $91.99, is the key level to watch here. Best Buy has never traded above that level for a meaningful amount of time, and a sustained breakout above $90 clears the way to considerable new upside ahead.

The combination of positive relative strength heading into a test of that level, plus a potential fundamental catalyst in earnings Wednesday, provides ample reason to keep a close eye on the Richfield, Minn., company this week.

While more speculative investors can consider building a starter position here, the more prudent move is to wait for the initial earnings reaction before jumping into this setup.

Currently, option volatility implies around an 8.8% one-day price reaction to Q1 earnings. That’s enough to send the shares to a real test of the $90 resistance level, but that level is unlikely to be completely left behind for investors who wait.

Likewise, waiting for earnings reduces the risk of a miss. There’s currently abundant support on the Best Buy chart, starting with the newly established floor at the-$80 level. From a risk management standpoint, that $80 line in the sand is a logical level to park a protective stop below.

Bulls are clearly in control of Best Buy’s price action right now. It makes sense to keep a close eye on the shares as this big tech retailer tests a key breakout level heading into earnings.