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Best Buy Dips After Earnings - Here's the Trade

Best Buy shares are dipping despite better-than-expected earnings. Here's how to trade BBY stock now.

Best Buy  (BBY) - Get Best Buy Co., Inc. Report stock is bouncing off Tuesday's session low but is still down about 4.5%.

The decline comes despite a healthy top- and bottom-line earnings beat before the open. Earnings of $1.71 a share topped expectations by 62 cents, while a more than tripling of online sales fueled a revenue beat as well.

Comparable-store sales came in strong as well, up 5.8% vs. expectations for 2.3%.

But while management said sales have been strong through the first three weeks of the month, it does not expect that type of momentum to continue. Further, it did not provide guidance.

The dip in Best Buy shouldn’t be a surprise, given its runup into the quarter. Further, a number of quality retail stocks paused despite reporting better-than-expected results, including Lowe’s  (LOW) - Get Lowe's Companies, Inc. (LOW) Report, Home Depot  (HD) - Get Home Depot, Inc. (HD) Report and Walmart  (WMT) - Get Walmart Inc. Report.

The question shifts to: Is this a dip to buy in Best Buy stock?

Trading Best Buy Stock

Daily chart of Best Buy stock.

Daily chart of Best Buy stock.

With Tuesday’s modest decline, we’re seeing Best Buy test its 10-day moving average for the first time in more than a month. That tells you the kind of strength we’re dealing with here.

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In mid-July, Best Buy stock gapped up over $90 resistance and up to all-time highs. 

The move sparked a strong rally, where the stock consistently became more and more overbought. That’s according to the RSI reading circled in blue at the top of the chart.

By the way, this gradually increasing overbought state is exactly why traders shouldn’t short strong stocks on this basis alone. For that matter, it’s also why they shouldn’t buy oversold stocks simply because they're oversold - the move can continue in the same direction for much longer than expected.

In the case of Best Buy, shares hit the 161.8% extension on the last trading day ahead of earnings while sporting a very lofty RSI reading. In combination with a long run without testing its 10-day moving average, the shares were ripe for a dip.

If the 10-day moving average holds as support, investors will be looking for a rotation back over Tuesday high (currently $113.86). Above that figure puts the potential for a gap-fill in play, up toward $117.

Above the all-time high and the two-times range extension is in play at $133.29.

Should the 10-day moving average fail to hold as support, it puts the 20-day moving average in play. Below that and the 123.6% extension could be tested near $100. 

As painful as it would be for some bulls, a retest of the $90 breakout level would likely represent a solid buying opportunity.