Dow component The Walt Disney Company (DIS) reports earnings after Tuesday's closing bell, with analysts expecting fiscal third quarter profits of $1.74 per share on $21.40 billion in revenue. There was little market reaction after the company beat second quarter earnings and revenue estimates in May, but the Mouse had just catapulted above multi-year resistance in a historic breakout and was extremely overbought heading into that report.
The stock is now trading just five points above the early May print, caught in the broad-based downdraft that has followed the escalation of the China trade war. It's also testing the 50-day exponential moving average (EMA) for the first time since April, which preceded the blockbuster announcement of its new streaming service, set to come online in the fourth quarter. Even so, Disney is still the Dow's strongest performer, posting an impressive series of new highs into the July 29 peak at $147.15.
However, it's possible that investors have over-reacted to the streaming service news because the landscape dominated by Netflix, Inc. (NFLX) has become increasingly splintered, with a plethora of new entrants that require individual subscriptions. At this pace, these services will eventually face the same limiting factors as broadcast networks, forced to join less profitable package plans that consolidate skyrocketing costs into a single easily understood monthly charge.
DIS Long-Term Chart (1990 – 2019)
The stock split twice in the 1990s during an ascent that topped out in the upper $30s in 1998. A 2000 breakout attempt failed, yielding a steady decline that posted an eight-year low at $13.42 in 2002. It turned higher during the mid-decade bull market but booked just modest gains, stalling at the .786 Fibonacci sell-off retracement level in the mid-$30s in May 2007. The subsequent pullback held close to the high into September 2008 and collapsed, dropping to a six-year low in March 2009.
A bounce into 2010 completed a round trip into the 2007 high, yielding sideways action, followed by a 2012 breakout that generated historic returns into the 2015 high at $122. ESPN viewership troubles then came to light, dropping the stock into a volatile correction that found support in the upper $80s in 2016. Lower highs and higher lows into the second quarter of 2019 carved a massive symmetrical triangle, with April's powerful breakout after the streaming news.
The rally has reached the parallel extension formed by triangle support and the 2015 high, marking the natural price target for the breakout. Meanwhile, the monthly stochastics oscillator has reached the overbought zone, adding risk to the equation, but it is showing no signs of crossing over in a new sell signal. Even so, the time has come for shareholders to protect outsized second quarter gains because a retest at breakout support could unfold at any time.
DIS Short-Term Chart (2016 – 2019)
Price action since December 2018 has carved an Elliott five-wave rally pattern, with a huge third wave continuation gap between $117 and $126. A Fibonacci grid stretched across this pattern raises the odds that the rally set has come to an end, with perfect alignment of the gap through the .50 retracement and the breakout through the .382 retracement. It's hard to be more specific because the fifth wave looks ragged at this point, without a clear indication of short-term direction.
The on-balance volume (OBV) accumulation-distribution indicator returned to the 2015 peak in April 2019, presaging the subsequent breakout, and mounted resistance in July. Unfortunately for bulls, choppy mixed action set into motion immediately, and OBV now risks a failed breakout. That distribution wave would be icing on the cake for sidelined investors hoping to buy this Dow and market leader closer to $120.
The Bottom Lone
Walt Disney stock may have completed the first stage of a major breakout and could offer a pullback buying opportunity when its tests new support in the $120s.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.