Best Buy Sell-Off Could Mark Buying Opportunity

Best Buy Co., Inc. (BBY) fell 5% on Wednesday after beating second-quarter estimates, with market players dumping shares in reaction to surprisingly weak third-quarter guidance. However, the company also raised full year guidance, now expecting 3.5% to 4.5% sales growth compared to previous 0% to 2% estimates, noting the “profitability profile of our quarters is not completely linear on a year-over-year basis.” (See also: Why David Einhorn Is Scooping up Retail Stocks)

The decline might be an over-reaction and buying opportunity, for three reasons. First, the stock is holding support at the 50-day EMA, which contained selling pressure during the rally into August’s all-time high at 84.37. Second, American consumers are spending lavishly so far in 2018, predicting a windfall year for major retailers. Finally, shares had risen 25% in the three months ahead of the report, raising odds for a sell-the-news reaction regardless of metrics.

BBY Long-Term Chart (1997 - 2018)

The stock broke out above its 1987 high in 1991, splitting four times during a powerful ascent that stalled in the upper 30s in the second quarter of 2000. It sold off into single digits just eight months later, marking the lowest low of the last 18 years, ahead of a recovery wave that ended at 2000 resistance in March 2002. The stock fell into October and then turned higher once again, finally breaking out in 2005. 

The uptick posted healthy gains into 2006, topping out at 59.50, ahead of a shallow pullback that accelerated during the 2008 economic collapse. The stock held up relatively well during that troubling period, bouncing at a 6-year low, but the rally fizzled out well below the 2006 peak in 2010. Sellers took control once again into 2012, testing 2002 range support while printing the lowest low so far this decade.  

The subsequent recovery wave finally completed a round trip into the 2006 high in May 2017, giving way to a 5-month consolidation pattern, followed by a December breakout that stalled in the upper 70s in January 2018. The stock ground out a second multi-month range and broke out once again on August 21, posting an all-time high before gapping back through new support after earnings.

BBY Short-Term Chart (2017 - 2018)

This week’s decline has come to rest at a 2-month trend line (red line) and the 50-day EMA, marking a pause ahead of lower prices or a tradable bounce. Continued testing at support is likely before either scenario plays out, giving observant technicians an opportunity to gauge buying and selling power before taking exposure. A rally into the low 80s will be significant if it happens, reinstating the August breakout.

On Balance Volume (OBV) reversed at the January 2018 high ahead of the news, failing to break out with price. This bearish divergence ended when the stock re-entered the trading range and the indicator fell to the lowest low since June. Short sellers may take their cues from this turnaround, pressing bearish bets until a decline reaches the February low in the mid-60s, which has narrowly aligned with a 2-year trend line (black line). 

The bilateral trade setup places the stock squarely between a rock and a hard place, with intermediate support matching strength against downside momentum and relatively weak shareholder commitment. In turn, it makes sense to stand aside and let other market players throw money at long and short positions until a victor is declared through a rally that penetrates the gap, or a decline that breaks the 2-month trend line.

The Bottom Line

Best Buy has sold off to support after a mixed quarterly report, generating a delicate balance between bulls and bears. This standoff should end quickly, setting off tradable buying or selling signals.

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