Disney Is a Buy -- Here's Why
The Disney (DIS) - Get Report earnings report after the close on Tuesday failed to meet analyst expectations, and the stock dropped over 4% in Wednesday's session. The rapid retracement has taken it back to a zone of support on the daily chart that should act as either the foundation for a basing process or a platform for a sharp reversal.
The weekly chart of Disney shows the stock in relentless primary uptrend from the beginning of 2012 to its 2015 high. About a year ago, however, it began to see wide swings in price, and the orderly advance was replaced by volatile turbulence. This year, moving average convergence/divergence crossed below its centerline, and Chaikin money flow moved into negative territory. These indicators reflect declining momentum and money flow during this dissonant period, but the stock was attempting to retake the long-term uptrend line when the earnings report struck.
On the daily chart, the recovery process this year took on the form of a cup and handle pattern, with rim line resistance in the $100 area. The break above that resistance last month powered a move back above the 200-day moving average to the $106.76 level, and this is where the stock was trading when the volatility began exactly one year ago. It looked like it would break this second level of resistance with the relative strength index and moving average convergence/divergence tracking above their centerlines, and the accumulation/distribution line above its 21-period signal average. The timing of the earnings announcement couldn't have been worse, and investor reaction was swift -- but possibly overdone.
On a technical side note, there is what looks like a discrepancy between the very large red or negative volume bar at the bottom of the chart and the positive spike in the accumulation/distribution indicator. They are both measures of money flow, but the volume bars are colored red if the current close was less than the previous day's close, while the A/D line uses the close relative to a stock's range that day to determine a positive or negative session. The A/D line advanced today because the close was near the high of the day.
So these are the reasons Disney is a buy right here and right now: A hammer candle formed in today's session, which is a bullish reversal candle when it forms at support; there is a confluence of support just below today's low, consisting of the 50-day moving average, the uptrend line drawn off this year's lows and cup and handle rim line resistance-turned-support; and finally, there is the psychological aspect of the durability of large round numbers, such as the $100 level.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.
