My bet that Best Buy (BBY) - Get Report shares would decline on disappointing first-quarter earnings proved correct. I warned that taking profits in the stock was the smart move and risking an earnings miss and weak guidance didn't make sense. But now it may be time to go long and play for a potential 7% bounce.
On Monday, I wrote:
Given the punishment retailers have taken so far for weak comps, it would be a mistake to risk a disappointment with Best Buy stock, especially with the shares having already outperformed the market year to date. And if its earnings don't meet or beat expectations, Best Buy shares will struggle to hold support at $30....
On Tuesday, Best Buy shares plunged almost 9% from Monday's close of $33 to the session low of $30.05. The stock closed Tuesday at $30.54, down 7.4%. Along with giving tepid second-quarter guidance, the electronics retailer announced that Sharon McCollam, the company's chief administrative and chief financial officer, has resigned effective in June.
It didn't seem to matter that Best Buy's first-quarter results surpassed analysts' estimates on both earnings and revenue. The uncertainty made the shares seem too risky to hold.
From a technical perspective, however, Best Buy stock is no longer as risky. The 7% gap created from Tuesday's decline could make for a profitable trade.
Take a look at the chart below, courtesy of TradingView.
As you can see from the black arrows in the chart, Best Buy shares have traded in a predictable pattern, bouncing between $33 and $30 per share since the middle of March. While Tuesday's 7.4% decline was a disappointment, the chart suggested it was likely to happen. Despite the uncertainty created by McCollam's departure, the fact that Best Buy stock held support at $30 per share (the solid blue line) is a positive sign.
Although the shares appear technically broken, Best Buy stock is only 1.2% away from reclaiming its 100-day average at $30.93 (the yellow line). If that happens, the next target is to reclaim support at $31.89, a rise of 4.3% from Tuesday's close. That would mark an almost 50% move to refill the 7.4% gap back to $33 per share.
While we were correct to sell the stock ahead on Tuesday's results, the risk profile for Best Buy stock is now more favorable. A move back to $33 is possible, especially with the company's earnings now out of the way. That's the kind of move the chart has predicted correctly on more than one occasion.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.