Walt Disney Co: Critical Level that DIS stock Investors Must See

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Walt Disney Co (NYSE:DIS) is one of the names that seems to be interested in acquiring Twitter Inc (NYSE:TWTR). Disney is slowly moving into the tech space, so perhaps there are some synergies there. But I’m not even going to contemplate the in and outs of this deal, or how Disney plans to monetize this asset. I am only focusing on how such a deal might affect the current allotment of DIS stock holders.

My analysis is unconventional, but it is used by many traders. I will apply my understanding of charts (and chart patterns) to help illustrate the dominant trend as it pertains to DIS stock.

DIS stock has already been trading with a bearish bias as Disney stock peaked in the summer of 2015, and has been drifting lower ever since. There were numerous signals warning investors that shares had peaked. These are the same signals that I will be watching to turn, in order to confirm that the trend has once again become bullish.

The following Disney stock chart illustrates the long-term trend and the momentum indicator that confirmed the bearish trend.


Chart courtesy of StockCharts.com

The chart above does a great job of painting the overall trend of DIS stock since shares bottomed shortly after the financial crisis in 2008. This bullish pattern is known to many traders as an ascending channel. There are two parallel lines that define this trend. These two trend lines define the upper and lower bounds, and DIS stock oscillates between these two trend lines for as long as time permits.

DIS stock is approaching the lower level of support, and the bull market in Disney stock hinges on this key level holding. A break below this level might have dire consequences.

On the chart above, you will notice the lower panel labeled “MACD.” Moving average convergence divergence (MACD) is a simple and effective trend-following momentum indicator. Signal line crossings are used to distinguish between bullish and bearish signals.

In December 2015, DIS stock generated a “sell” signal when the monthly MACD signal crossed in a bearish manner. This signal effectively halted any sustained gains in price, and the drift toward lower prices developed as a result.

When this signal crosses in a bullish manner, the trend higher would have already begun. This signal serves to confirm that a trend that has already developed, and this is why it is referred to as a lagging indicator.

The following Disney stock chart can help shed some light on the current short-term downtrend.


Chart courtesy of StockCharts.com

The downtrend that has developed is clear as day and is defined by the trend line (highlighted in blue). This line is created by connecting the peaks on a price chart. A downtrend is defined by lower lows, confirmed by lower highs. It can easily be identified as the price moves from the upper left to the lower right. This is a clear example of bearish price action, and DIS stock will continue to trade with a bearish bias for as long as Disney stock trades below this trend line.

In January 2016, DIS stock generated a death cross that reaffirmed the bearish trend. A death cross is a bearish signal that is produced when a faster 50-day moving average (highlighted in blue) crosses below a slower 200-day moving average (highlighted in red). This signal is similar to the MACD and is used to reaffirm and confirm the dominant trend.

Nothing on the chart above is suggesting that the current bearish trend is even attempting to turn bullish. The downtrend is still intact and the moving averages are in bearish alignment.

Perhaps an intraday chart will provide some solace for the bulls. The following Disney chart focuses on trading over the last two months and uses a one-hour scale.


Chart courtesy of StockCharts.com

The chart above highlights the trading action over the past two months, and the picture is not bright. Price has a habit of moving in impulse waves that are followed by consolidation waves. These patterns make the step-like action that many are accustomed to seeing on a price chart. DIS stock is currently sitting within a consolidation wave. The price will trend in whichever direction the price breaks out of this consolidation wave.

Bulls are hoping that the long-term support, as illustrated by the ascending channel on the first chart, will hold and reject the current downtrend.

The Bottom Line on Disney Stock

I am bearish on DIS stock because all the indicators are still on bearish signals. If the uptrend line produced from the channel does not hold, a precipitous drop in Disney stock may occur and the news surrounding Twitter may be the catalyst that send shares tumbling. In order for the bulls to rejoice, the price needs to start moving higher now.