DIS Stock: Indications Are Now in Bearish Alignment
Walt Disney Co (NYSE: DIS) reported earnings on August 8, 2017, and the numbers were lackluster to say the least, as they missed on both the top and bottom lines. What caught many off guard is that Disney announced its plans to end its relationship with Netflix, Inc. (NASDAQ: NFLX) and instead start its own streaming service. This compilation of news may be difficult to quantify, but the market has spoken, and the initial reaction was a negative one that sent DIS stock down by 3.88%. As a headline number, this drop doesn’t seem so significant, but the problem is that this drop has caused a number indications on the Disney stock chart to swing into bearish alignment.
To quickly clarify for those that are unaware, my views on an investment are based on my ability to decipher technical indications that are generated on a stock chart. This method of investment analysis is called technical analysis, and I have been studying and applying this method to my investment strategies for nearly two decades.
Whenever I have expressed my bullish views on an investment, I always state that the view is predicated on the indications remaining in bullish alignment. The caveat is, if the indications suggest that another is view is warranted, then I have to change my view to match. The drop in Disney’s share price has done quite a bit of damage to the picture that was being painted on the stock chart, and therefore, I must take a step back and remove my bullish view on it.
The following Disney stock chart illustrates a long-term level of price support that was broken when the stock price gapped lower on August 9.
Chart courtesy of StockCharts.com
This DIS stock chart illustrates the ascending channel that has been supporting the stock’s advance since 2009, which marked the conclusion of the financial crisis.
The ascending channel, which defined the predominant trend, is created using two upward-sloping trend lines that represent levels of price support and resistance. The theory behind this pattern is that as long as the stock price oscillates between these levels of price support and resistance, then the trend towards higher prices is set to continue. The problem is that the drop in DIS stock following the earnings report caused the price to fall below the trend line that served to define support. This suggests that the bullish trend towards higher stock prices has concluded and therefore a larger correction can now be expected to follow.
Falling below this level of support is magnified by the fact that this level of price support has been in development for nine years, suggesting that it is very significant and important. This indication alone is reason for concern, and it is being magnified by a compilation of indications that are reinforcing the notion that perhaps a larger correction is now in order.
The following Disney stock chart illustrates this compilation of bearish indications.
Chart courtesy of StockCharts.com
This DIS stock chart illustrates the price action on a smaller scale. There are a number of bearish indications that have just been generated on this price chart.
The first indication is the breakaway gap that is highlighted on the stock chart. Breakaway gaps rarely get filled and almost always indicate that a new trend is in development. What makes this gap in the stock price that much more significant is that it caused the stock price to break through the trend line that outlined support. Gaps that occur at important levels of price support or resistance carry more credence, and in this circumstance, it strengthens the bearish case.
The next indication was generated when the faster 50-day moving average crossed below the slower 200-day moving average. This indication is called a death cross, and the name alone should send shivers down your spine. The death cross suggests that a bear market in DIS stock is now in development. It unwinds the golden cross—which was created in December 2016—that suggested a bull market was in development.
This compilation of indications is enough to suggest that a bullish view is no longer warranted on Disney stock. The trigger that will act to suggest that a larger correction is set to ensue would entail the stock price closing below $100.50, which was the low created when DIS stock gapped lower.
Bottom Line on Disney Stock
Disney stock gapped lower following its earnings announcement on August 8. This sell-off caused a number of indicators to swing into bearish alignment, suggesting that lower prices are now likely the path of least resistance. So, as a result, I have little recourse but to take a step back from my bullish view on DIS stock.