Disney Stock Running in Place After Horrific Quarter

Dow component The Walt Disney Company (DIS) is trading flat in Tuesday's pre-market after reporting a 58% drop in first quarter operating income as a result of theme park, cruise line, and movie production closures in reaction to the coronavirus pandemic. Streaming services income offered the sole bright spot in an otherwise dreary report, with the Disney+ paid subscriber base rising to 33.5 million. The company is suspending the first half dividend payout to raise additional cash. 

The entertainment giant posted earnings per share of $0.60, well below consensus estimates of $0.90, while revenue rose 20.7% to $18.01 billion. ESPN+ added to impressive streaming services metrics, rising from 2.2 million to 7.9 million subscribers. Shanghai Disneyland is set to reopen on May 11 with limited density, but the company offered no estimates about when U.S. and other international operations would resume.

Studio entertainment rose 18% to $254 billion, but live and animated production at Disney, Pixar, and Marvel has come to a grinding halt, with no resumption dates on the calendar. This will affect revenue for many quarters because the studios will have fewer films to release when movie theaters finally open and less content for streaming subscribers. In addition, the shutdown will affect highly profitable sales and rentals in the months following theatrical releases.

Disney stock failed a multi-year breakout in the first quarter and dropped to a five-year low in the upper $70s in March. It has added about 20 points since that time but has failed to remount a single support level broken during the sell-off, telling informed market players that the downtrend that started in November 2019 remains fully intact. As a result, renewed selling pressure that tests or even breaks the deep low cannot be ruled out.

DIS Long-Term Chart (1998 – 2020)

A multi-year uptrend topped out at $42.50 in 1998, ahead of a failed 2000 breakout attempt that completed a double top breakdown after the Sept. 11 attacks. The decline ended at a seven-year low in the mid-teens in the fourth quarter of 2002, giving way to modest uptick that stalled in 2007 more than seven points below prior resistance levels. The stock tested the 2002 low during the 2008 economic collapse, holding less than two points above that level at the March 2009 bottom.

A healthy bounce completed a round trip into multi-year resistance in 2011, while a 2012 breakout attracted intense buying interest. The stock posted the most prolific gains of the century into July 2015, topping out at $122.98 and turning sharply lower into February 2016. Price action held with that eight-month trading range into April 2019, carving a well-organized ascending triangle pattern that broke to the upside after the company announced the Disney+ release date.

The stock carved three higher highs into November's all-time high at $153.41 and pulled back in a shallow decline that accelerated to the downside in mid-February. It failed the breakout at the start of March and the triangle's rising trendline less than two weeks later. The bounce into April reached the broken trendline near the end of the month, generating a reversal that reinforces resistance above $110.

DIS Short-Term Outlook

The monthly stochastic oscillator entered a complex sell cycle from the overbought zone in September 2019 and still hasn't reached the oversold zone, despite a sell-off of 70-plus points. This divergence waves an additional red flag, indicating that it will take relatively little effort for aggressive sellers to dump the stock into the March low. More importantly, the current sell cycle will need to cross into the oversold zone by that time or risk a breakdown that drops Disney stock into the 200-month exponential moving average (EMA) and .618 Fibonacci rally retracement in the upper $60s. 

The Bottom Line

Disney stock is trading lower after earnings, continuing a downtrend that has the potential to break the deep March low in the upper $70s.

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