Dow component The Walt Disney Company (DIS) has dropped precipitously in the past two months, with shareholders running for the exits in reaction to a second quarter earnings report on May 9 that highlighted exceptionally weak results at ESPN. Cord cutting has taken a major toll on ad revenue at the sports network, with April's layoff announcement confirming declining growth.
Disney reported an 11% year-over-year decline in first quarter operating income at its cable networks division, underpinned by ESPN's loss of more than 10 million viewers in the past two years. Cable sports were considered invulnerable to the exodus out of traditional broadcasting prior to 2015, but that myth has been exploded by a steady viewership decline that has unnerved the company's institutional shareholder base. (For more, check out It's Groundhog Day for Wall Street and ESPN.)
Even so, a near endless string of billion-dollar hit movies has contributed to steady growth that is likely to put a floor under the stock price, at least in the short term. In addition, the decline that started in April has now reached deep support levels and oversold technical readings that could yield excellent profits for well-timed buy-the-dip strategies. Just don't stick around too long, because heavy distribution predicts that sellers will eventually return in force.
DIS Long-Term Chart (1990 – 2017)
The stock charged higher throughout the 1990s, underpinned by an animation renaissance that produced mega-hits including "The Lion King" and "Beauty and the Beast." Disney shares topped out at $42.75 in 1998 and tested that level two years later, building a long-term top ahead of a downtrend that continued into the 2002 low at $13.48. A bounce through the middle of the decade failed to reach the prior high, stalling in the mid-$30s in 2007.
Disney stock plunged with world markets during the 2008 economic collapse, posting a higher long-term low at $15.14 in March 2009, ahead of a powerful bounce that reached 13-year resistance in 2011. A 2012 breakout generated the strongest returns so far in this millennium, with the stock nearly tripling in price into the August 2015 high at $122.08. ESPN fired its first warning shot just one day later, triggering an 11-point decline that trapped newly minted shareholders in steep losses.
A lower high in the fourth quarter of 2015 attracted aggressive selling pressure, undercutting the mid-year low before finding support in the mid-$80s in February 2016. The stock spent the next eight months testing that support level, ahead of a November rally wave that stalled within six points of the 2015 high in April 2017. The company then reported more problems at ESPN, triggering a 12-point decline into June's six-month low at $104.08. (For more, check out DIS Results: Is the ESPN Sky Falling?)
DIS Short-Term Chart (2015 – 2017)
The 2017 bounce reversed at the .786 Fibonacci retracement level of the 2015 into 2016 downtrend, posting a lower high when it broke a four-month rising channel. The subsequent decline reached the 200-day EMA in mid-May, undercutting that level last week and jumping back above support on Monday. This two-sided price action bodes well for a strong bounce in coming weeks, but it is unwise to expect a 100% swing back to the April high.
On-balance volume (OBV) highlights recent technical damage, spiraling lower in a distribution wave that has now reached a seven-month low. Meanwhile, weekly stochastics have turned higher from the oversold level, raising the odds for a bounce that lasts six to 10 weeks at a minimum. Taken together, dip trades between $105 and $107 could reward strict risk management protocols that take aggressive profits when sellers return, most likely in the $110 to $115 price zone. (To learn more, see Stochastics: An Accurate Buy and Sell Indicator.)
The Bottom Line
Disney's stock has reached a deep support level after a multi-month slide that has dropped the Dow component to a 2017 low. Dip buying strategies could reward risk-conscious positions, but timely exits will be required due to technical damage that should eventually attract aggressive short sellers. (See also: Could Disney Be Due for a Rebound?)
<Disclosure: the author held no positions in aforementioned stocks at the time of publication.>