Oversold Disney Stock Set for Big Bounce

Dow component The Walt Disney Company (DIS) looks set to bounce strongly in coming weeks and carve the next leg of a broad sideways pattern in place since 2015. More importantly, the recovery wave should generate enough profit potential for short-term traders, while prospective investors can also jump on board because reward:risk has dropped into an extremely attractive ratio, with the potential for 15% to 20% upside.

You're right if this feels like déjà vu after the rally above three-year symmetrical triangle resistance in July 2018. That buying impulse ended within two points of 2015's all-time high in November, yielding a downturn and failed breakout about two weeks ago. However, the decline has now reached triangle support, while weekly relative strength readings have plunged into oversold levels, raising the odds for a recovery wave that could eventually complete the long-term breakout.

Disney has a full slate of potential mega-hits waiting for 2019 release, including the last Marvel "Avengers" film, the third "Star Wars" movie and "Frozen 2." In addition, the entertainment giant will finally roll out an eagerly awaited streaming video service that could take significant market share from Netflix, Inc. (NFLX) and other rivals. These initiatives should provide significant boosts to already impressive revenues and profits, allowing the stock to finally reach new highs.

DIS Long-Term Chart (2007 – 2018)

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

The stock rallied to a seven-year recovery high in June 2007 after hitting an eight-year low at the end of the 2000-2002 bear market. It ground sideways into the second half of 2008 and turned sharply lower, finding support less than three points above the 2002 low in March 2009. The subsequent recovery wave unfolded in a V-shaped pattern that completed a 100% round trip into the prior high in May 2010.

A 2012 breakout caught fire, booking the most impressive gains so far this century. The long series of higher highs and higher lows finally ended above $122 in August 2015, when the company reported an unexpected downturn in ESPN viewership, raising fears about the cable cord-cutting phenomenon. The subsequent decline found support in the mid-$80s in February 2016, establishing the lower end of a trading range that hasn't been challenged in over three years.

Price action finally ended a long period of contraction in July 2018, clearing resistance at the 2017 high after breaking out above symmetrical triangle resistance. However, the rally ended before testing the 2015 high, while the subsequent downturn has now reached triangle support and the magic number $100. This critical level has the potential to end the current down wave and start the next up wave.

Impact of Conflicting Time Frames

The weekly stochastics oscillator has dropped to the same oversold level that corresponded with 2016, 2017 and April 2018 swing lows at triangle support (red line), predicting that the stock will find healthy buying interest around $100. However, the monthly indicator is engaged in a sell cycle that may not hit oversold until the second quarter of 2019. So, while a bounce may cross the weekly into a buy cycle, the conflict between time frames favors slow progress and two-sided action.  

The stock also needs to hold above 2017 and 2018 lows at $96 and $97.50 because major sell signals would be generated by a triangle breakdown. Unfortunately for bulls, that event has the potential to end more than three years of testing in a broken top that establishes a secular downtrend. Consider hitting the sidelines or establishing short sales if that happens because the sell-off could break the 2016 low in the $80s and spiral toward long-term support in the $60s. 

The Bottom Line

Disney stock has reached critical support after a vertical decline and could bounce strongly in early 2019, reaching range resistance near $120. 

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

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