Dow component The Walt Disney Company (DIS) has failed April 2019's major breakout, despite the wildly successful launch of the Disney+ streaming service in November, and sold off to an 11-month low. The stock has also dropped to a price level first traded nearly five years ago, offering strong evidence that the long-term uptrend has finally come to an end. If so, frustrated shareholders should consider their options because the current decline could easily stretch into the lower $90s.
The painful transition from market leader to laggard in 2020 has been stunning after 2019's impressive 30%-plus return. While the coronavirus outbreak is to blame for the current somersault, Disney stock has lagged the S&P 500 index since the start of the year, held down by lower-than-expected box office receipts for the most recent "Star Wars" installment and the transition into a new era for the Marvel Comic Universe.
Meanwhile, the outbreak has investors running for the hills because Disney faces headwinds in multiple enterprises. For starters, attendance at theme parks is now dropping precipitously, with Asian closures and Americans seeking to avoid crowded spaces. That phobia could extend into movie theaters in coming weeks, with patrons willing to forgo first runs in favor of on-demand viewing at a later date.
The entertainment giant also owns and operates Disney Cruise Line, a highly successful four-ship enterprise, but that venue is in freefall all around the world after two incidents involving mass quarantines. Just look at Royal Caribbean Cruises Ltd. (RCL) since January, with the stock dumping more than 50% in less than two months. All in all, it's a perfect storm that could undermine returns for several years.
DIS Long-Term Chart (1990 – 2020)
The stock rocketed higher in the 1990s, underpinned by an animation renaissance that delivered a number of classics, including "The Lion King," "Beauty and The Beast," and "Aladdin." It topped out in the upper $30s in 1998 and failed a 2000 breakout attempt, carving a double top pattern that broke to the downside following the Sept. 11 attacks. Selling pressure continued into the fourth quarter of 2002, finally ending at an eight-year low in the lower teens.
A modest uptrend during the mid-decade bull market stalled near the .786 Fibonacci sell-off retracement level in 2007, giving way to a vertical decline that found support less than two points above the 2002 low in March 2009. The subsequent recovery wave completed a round trip into the prior high two years later, setting the stage for a 2012 breakout that attracted intense buying interest.
The uptrend topped out in the summer of 2015 after the ESPN division reported viewership losses, yielding a steep correction that transitioned into a broad symmetrical triangle pattern. It finally broke out in April 2019 after company executives announced a November release date for the highly anticipated Disney+ streaming service. The stock zoomed to $140 within a few weeks and added two higher highs into the Nov. 26 all-time high at $153.41.
DIS Short-Term Outlook
Price action then entered a period of steady distribution, with smart money taking aggressive profits into January 2020 when an upbeat earnings report triggered a bounce that failed at a lower high. Outbreak fears then took control of the ticker tape, generating a failed breakout when the decline cut through the bottom of the April gap at $117. The downside has now stretched nearly 30 points, shocking complacent shareholders.
Triangle support near $107 should slow or stall the downside in coming sessions, but aggressive sell signals are in now in force, raising the odds that short sellers will reload positions at or below new resistance at $117. The subsequent downdraft could gather tremendous energy, dropping Disney into the lower $90s, where the 2015 and 2016 trading floor marks the last major line of defense until the upper $70s.
The Bottom Line
Walt Disney stock has failed the April 2019 breakout and could sell off into the double digits in coming weeks.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.