ViacomCBS (VIAC) Could Offer Profitable Short Sales

ViacomCBS Inc. (VIAC) stock has more than doubled in price since breaking down in the first quarter, but the oversold rally has now stalled at major resistance, while accumulation readings reveal little or no buying interest. This potent and deadly combination could signal timely short sales ahead of renewed selling pressure that could relinquish a large percentage of short-term gains and test March's 10-year low at $10.10.

Viacom and CBS completed their merger on Dec. 4, 2019, rejoining two entertainment giants that split apart more than a decade ago. The stock is now trading 35% lower than at the time of the hook-up, trapping investors who expected the combination to end a persistent exodus of Viacom viewers. Sadly for bulls, the new enterprise is also highly dependent on advertising revenues that have slumped badly due to the COVID-19 pandemic.

Key Takeaways

  • ViacomCBS stock is now trading 35% lower than at the time of the December 2019 merger.
  • The stock broke down from a multi-year double top pattern in March, initiating a long-term downtrend.
  • The oversold rally since March has stalled at major resistance, raising the odds for a reversal and lower prices.

The company is seeking to make its mark in subscription-based and free streaming channels through CBS All-Access and Pluto TV, but the venue has become overcrowded with better-run competitors, forcing ViacomCBS to take a thinner slice of available income. Even so, the effort provided a bright spot in the second quarter of 2020, with 52% segment growth easing the impact of reduced cable and satellite income.

Price action in recent months has been less than spectacular, with positive catalysts failing to move the stock. The stock has added less than one point since the company beat second quarter 2020 profit estimates on Aug. 6, highlighting apathy that could translate into sharply lower prices. Revenue from all divisions also beat estimates but fell 12% year over year, confirming macro headwinds that may not ease until 2021 at the earliest.

Wall Street consensus rates ViacomCBS stock as a "Moderate Buy," based upon eight "Buy" and nine "Hold" recommendations. Curiously, just one analyst recommends that shareholders sell positions and move to the sidelines at this time. Price targets currently range from a low of $22 to a Street-high $45, while ViacomCBS will open Wednesday's session about $2 below the median $29 target. Given this placement, ad revenues may need to improve substantially to support higher prices.

A catalyst in is an event or other news that propels the price of a security dramatically up or down. A catalyst can be almost anything: an earnings report, an analyst revision, a new product announcement, a piece of legislation, a lawsuit, the outbreak of war, an offer to buy a company, a move by an activist investor, a comment from a CEO or government official, or the conspicuous absence of a company officer at a special event.

ViacomCBS Daily Chart (2016 – 2020)

Chart showing the share price performance of ViacomCBS Inc. (VIAC) 

A multi-year uptrend topped out in the upper $60s in 2014, giving way to a decline that found support in the upper $30s in the third quarter of 2015. That trading range marked the outline of a double top pattern that broke down on heavy volume in February 2020, establishing a new long-term downtrend. The 50-month moving average is now approaching the breakdown level, reinforcing heavy resistance centered between $38 and $40.

The first quarter decline ended just below the .786 Fibonacci retracement level of the 2009 into 2014 uptrend, while the oversold bounce stalled at the .618 retracement in June. This level has now aligned with the 200-day exponential moving average (EMA), which was broken in the third quarter of 2018. The stock has failed multiple attempts to mount this barrier in the last 20-plus months, making the current uptick into this barrier a potential opportunity for profitable short sales.

An exponential moving average (EMA) is a type of moving average (MA) that places a greater weight and significance on the most recent data points. The exponential moving average is also referred to as the exponentially weighted moving average.

The on-balance volume (OBV) accumulation-distribution indicator fell off a cliff in March 2020, dropping to the lowest low since 2015. Healthy buying power into June stalled at 2017 resistance, initiating a second distribution wave that nearly reached the low in July. Bottom fishers are active once again, but their efforts, so far at least, have failed to improve the dismal volume pattern, which predicts lower prices in coming months.

The Bottom Line

ViacomCBS stock has rallied into heavy resistance that could offer profitable short sales.

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

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