Best Buy (BBY - Get Report) reports quarterly earnings on Wednesday. If history repeats, Best Buy should continue to do well as this stock set a bull market bottom in November 2008 in anticipation that Circuit City would fail.
Best Buy did have a bear market of its own from April 2010 to a bottom in December 2012. Since this bottom, the electronics and appliance retailer has a string of 16 consecutive quarters of beating analysts' earnings-per-share estimates. Even with this winning streak, today's weekly chart will show that the stock has been extremely volatile, with a warning to heed before earnings.
Analysts expect Best Buy to earn $1.66 a share. Zacks, while noting the huge earnings beat in their previous quarter, indicates that revenue should be lower than the year-ago quarter. The daily chart will show huge price gaps higher following better than expected earnings reported on Nov. 17 and Aug. 23.
Shares of Best Buy closed Friday at $45.63, up 6.9% year to date, and is in bull market territory 23% above its post-election low of $37.10 set on Nov. 9. Longer-term, the stock is in bear market territory 21.2% below its all-time intraday high of $57.93 set in April 2006. As a warning, the stock is 7.6% below its post-election high of $49.40 set on Dec. 6.
Here's the daily chart for Best Buy.
Courtesy of MetaStock Xenith
The daily chart for Best Buy shows that the stock has been above a "golden cross" since June 1 when the stock closed at $33.47. A "golden cross" occurs when the 50-day simple moving average rises above the 200-day simple moving average indicating that higher prices lie ahead.
The upside was enhanced buy a price gap higher at the open on Aug. 23 on better-then-expected earnings. The close on Aug. 22 was $32.80, and the price gap to the Aug. 23 open of $38.36 totaled 17%. On Nov. 17, there was another price gap higher on positive earnings. This time the stock rose by 6% from the close of $40.45 on Nov. 16 to the open of $42.89 on Nov. 17.
A warning from this technical setup is the downside risk on a negative reaction to earnings. If the stock is below its 50-day simple moving average of $44.71, the downside risk is to fill the gap to the Nov. 16 high of $40.60 then the 200-day simple moving average of $38.38.
Here's the weekly chart for Best Buy.
Courtesy of MetaStock Xenith
The weekly chart shows a red line through the price bars, which is the key weekly moving average (a 5-week modified moving average). The green line is the 200-week simple moving average considered the "reversion to the mean."
The study in red along the bottom of the charts is weekly momentum (a 12x3x3 weekly slow stochastic), which scales between 00.00 and 100.00, where readings above 80.00 indicates overbought and readings below 20.00 indicates oversold.
A negative weekly chart shows the stock below its key weekly moving average with weekly momentum declining below 80.00 in a trend toward 20.00. A positive weekly chart shows the stock above its key weekly moving average with weekly momentum rising above 20.00 in a trend toward 80.00.
The weekly chart for Best Buy is neutral with the stock above its key weekly moving average of $44.51 and well above its 200-week simple moving average of $33.54, last tested during the week of July 1 when the average was $29.52. The weekly momentum reading ended last week at 48.74 down from 50.97 on Feb. 17.
The horizontal lines are the Fibonacci Retracement levels from the all-time intraday high of $57.93 set in April 2006 to the low of $10.83 set in January 2013. Since this bottom, there have been several bull market and bear market trends that can be monitored by the retracement levels. The stock could not stay above its 61.8% retracement of $39.94 in January 2014 and crashed to and held its 23.6% retracement of $21.94 during the week of Jan. 31, 2014. A bull market back to the 61.8% retracement during the week of March 24, 2015, was followed by a bear market to below its 38.2% retracement during the week of Aug. 29, 2015. The stock has been above its 61.8% retracement of $39.94 since the price gap higher on Nov. 17. This is thus the key level to hold following a negative reaction to earnings.
Trading Strategy: Buy Best Buy on weakness to my annual value level of $38.92. Sell strength to my monthly and semi-annual risky levels of $47.20 and $57.75, respectively.