Trade Recommendation: Walt Disney

Technical Overview

  • The Walt Disney Company has been a major laggard since topping in 2015 at $122.08. Until then, the stock had quadrupled since October 2011, finding support at a well-defined long-term trendline (green portion of upward-sloping trendline in Figure 1).
  • After the long-term trendline was broken to the downside, in January 2016, it turned into a resistance, halting the stock’s advance in 2016 (red arrow).
  • The $90 is a significant long-term horizontal support (bright blue horizontal trendline).

Figure 1. DIS 4-day Chart

  • DIS often reverses after well-defined patterns are formed. Just in the last 2 years, the stock had reversed after forming an upward-sloping trading channel (purple trendlines in Figure 2) and 3 H&S patterns (bright blue trendlines and arrows).
  • For the past 2 months, the stock oscillated within a 5-dollar horizontal trading range ($97.70 to $102.70 violet horizontal trading range). Yesterday (May 16), the stock broke decisively above the upper boundary of the channel.

Figure 2. DIS Daily Chart

  • The most significant technical development has been the formation of a large 3-year triangle (lower boundary of triangle – green trendline, upper boundary – red trendline, Elliot waves – A-B-C-D-E – in Figure 3). Wave E overshooting the lower boundary of the triangle, while remaining above the low of wave C, is a common occurrence of the final wave of the triangle. Note, the trendlines in Figure 3 should be drawn slightly differently if they were to connect the lows of the waves. This, however, has no implications as the slopes of the boundaries of the triangle are nearly identical irrespective of the way they are drawn.

Figure 3. DIS 2-day Chart

Implications

  • The breakout above the 5-dollar trading range activated an upside target of $107.70.
  • Due to the lack of major resistance areas between $107.70 and $110, the stock is expected to at least move up to $110.
  • If the large formation is indeed a triangle, a breakout above the upper boundary (red trendline) may lead to a sharp leg-up.

Outlook

  • Short-term bullish as long as the stock remains above the upper boundary of the horizontal trading channel (i.e. above $102.70). Neutral if the stock moves back within the trading channel. Short-term bearish below the lower boundary ($97.50).
  • Long-term neutral with a bullish bias within the large triangle. A break above the red trendline will shift the long-term outlook to outright bullish. Moderately bearish if the stock breaks the low of wave C ($96). Outright bearish if the stock breaks below $90.

Trade Recommendation

  • Buy half a position at current levels ($104.34 at EOD on May 17). Buy another half if the stock breaks the upper boundary of the triangle (currently at roughly $112).
  • Target: Half at $121 (just below prior all-time high). Half at $140 (projecting $30 from the point of the breakout).
  • Stop: A close below $96.

Disclosure: Small stock/call positions. May add to position at any time.

Featured image courtesy of Shutterstock.

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