Disney Stock Could Offer Profitable Short Sales

Dow component The Walt Disney Company (DIS) has reached resistance at the price level traded just prior to April 2019's historic breakout, which failed on heavy volume in March. This signals a nearly ideal short sale set-up, ahead of a potential reversal and downturn that could generate high-percentage profits. Other technicals are cooperating perfectly with this bearish pattern, raising the odds that it will unfold as predicted.

The descending 200-day exponential moving average (EMA), broken two weeks ahead of the failed breakout, has narrowly aligned with new resistance between $118 and $124. In addition, accumulation readings are slumping badly, undercutting the March low just one week ago. At the same time, relative strength cycles have failed to respond to the uptick, maintaining a long-term sell cycle that has now entered its seventh month.

Disney's challenges have been well documented, with movie production, theaters, theme parks, and cruise ship lines shut down around the world. Disney+, ESPN+, and Hulu streaming services have performed well during this period, picking up millions of new subscribers, but this division comprises just a small share of the entertainment giant's massive $206.6 billion market capitalization.

Theme parks are reopening slowly, with social distancing measures in effect, but movie production remains at a standstill, with the Southern California lockdown set to remain largely in effect into mid-June. Older and wealthier consumers are likely to avoid large crowded places, like theme parks and movie theaters, for months after reopenings are completed, compounded by an entertainment pipeline that will take at least one year to restore. 

Most importantly, it's hard to understate the effect of warm weather on the pandemic, with the likelihood of a second wave this fall and winter. That raises the prospect of new quarantines at the same time that folks grow complacent and take the next step toward normalization. If the timeline follows the path of the Spanish Flu's deadly second wave in the fall of 1918, Disney stock could easily sell off to 2012 support in the $40s.

DIS Long-Term Chart (1998 – 2020)

Long-term chart showing the share price performance of The Walt Disney Company (DIS)

A multi-year uptrend topped out at $42.75 in 1998, establishing a resistance level that denied breakout attempts in 2000, 2007, and 2011. The stock finally cleared that barrier in 2012, entering a historic advance that stalled at $122 in July 2015, when the company reported an unexpected downturn in ESPN viewership due to the cord cutting phenomenon. A decline into February 2016 completed the first leg of a massive symmetrical triangle that carved higher lows in 2017 and 2018.

The stock broke out in April 2019 after the company announced the fourth quarter release of the eagerly anticipated Disney+ streaming service. The rally unfolded through three waves, culminating in November 2019's all-time high at $153.41. Profit-taking then took control, generating an orderly pullback that accelerated into a near-panic when the virus hit the headlines. The ensuing rout sliced through the 200-day EMA in February and breakout level the first week of March. 

DIS Short-Term Chart (2018 – 2020)

Short-term chart showing the share price performance of The Walt Disney Company (DIS)

The on-balance volume (OBV) accumulation-distribution indicator topped out with price in 2015 and entered a distribution phase that ended after the 2016 presidential election. A slow-motion uptick reached resistance in April 2019, ahead of a July breakout that ended in November. OBV pulled back to new support and broke down with price in the first quarter, dropping to the lowest low since June 2018 before a bounce into April failed, yielding a new low just one week ago.

The two-month recovery wave has now reentered the bottom of the triangle at $107 and retraced 50% of the decline, reaching the April 2019 breakout level at $118, which generated a buy gap to $125. The 200-day EMA is descending quickly through this price zone and coming into close alignment with the failed breakout, setting off short sale signals predicting that bears will soon wrest control of the ticker tape.

The Bottom Line

Short sellers are rounding the wagons on Walt Disney, with the stock reaching heavy resistance at the first quarter breakdown.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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