Best Buy Pops on Earnings but Fails to Hold Risky Level

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Best Buy Co., Inc. (BBY) beat analysts’ earnings estimates before the open on Nov. 26, and the stock set its 2019 intraday high of $83.62 on the same day. The stock closed that day below its quarterly risky level at $81.74 – this indicated risk to its semiannual pivot at $78.08, which was tested on Dec. 1.

The retailer of consumer durables announced today that it would begin a themed sales campaign on Monday, Dec. 9, called “12 Days of Deals,” good through Dec. 20. This doorbuster promotion focuses on electronics, including brands from Apple Inc. (AAPL), Samsung Electronics Co., Ltd. (SSNLF), Microsoft Corporation (MSFT), and Alphabet Inc. (GOOG). The catch is that each of the 12 days will have one theme that guarantees the lowest prices for products offered each day.

Best Buy stock closed Thursday, Dec. 5, at $80.32 ,up 51.7% year to date and in bull market territory at 68.3% above its low of $47.72 posted on Dec. 24, 2018. The stock is still reasonably priced with a P/E ratio of 13.13 and a dividend yield of 2.56%, according to Macrotrends.

In the longer term, Best Buy is consolidating a 2018 bear market. In 2018, the stock declined 43% from its all-time intraday high of $84.37 set on Aug. 22, 2018, to its Dec. 24 low of $47.72.

The daily chart for Best Buy

Refinitiv XENITH

The daily chart for Best Buy shows how my proprietary analysis provides key levels that are tradeable. The close of $52.96 on Dec. 31, 2018, was an important input to my analytics, and the stock has been above its annual value level all year long. The close of $69.73 on June 28 was an input to my analytics, and the second half semiannual risky level is $78.08. This level was first tested on July 26 as a level at which to book profits. The stock subsequently declined to $62.04 on Aug. 29.

The close of $68.99 on Sep. 30 was an input that resulted in the quarterly risky level at $81.74. This level was not tested until the earnings beat on Nov. 26. The close of $80.64 on Nov. 29 was the latest input, and Best Buy’s value level for December is $73.18.

The weekly chart for Best Buy 

Refinitiv XENITH

The weekly chart for Best Buy is positive but overbought, with the stock above its five-week modified moving average of $75.41 and above the 200-week simple moving average, or “reversion to the mean,” at $57.88, last tested during the week of Dec. 28, 2018, when the average was $49.30. The 12 x 3 x 3 weekly slow stochastic reading is projected to end the week at 80.41, above the overbought threshold of 80.00. At the low on Dec. 24, 2018, this reading was 7.43, well below 10.00 as the stock became “too cheap to ignore.”

Trading strategy: Buy Best Buy shares on weakness to the semiannual and monthly value levels at $78.08 and $73.18, respectively, and reduce holdings on strength to the quarterly risky level at $81.74.

How to use my value levels and risky levels: Value levels and risky levels are based upon the last nine monthly, quarterly, semiannual, and annual closes. The first set of levels was based upon the closes on Dec. 31, 2018. The original annual level remains in play. The close at the end of June 2019 established new semiannual levels, and the semiannual level for the second half of 2019 remains in play. The quarterly level changes after the end of each quarter, so the close on Sep. 30 established the level for the fourth quarter. The close on Oct. 31 established the monthly level for November.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.

How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. Recently, I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an “inflating parabolic bubble,” as a bubble always pops. I also refer to a reading below 10.00 as “too cheap to ignore.”

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.

Source: Investopedia

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