Stock analysis

Disney Price Action Could Signal Long-Term Top

Shares of The Walt Disney Company (DIS) sold off more than 4% in Thursday’s session, breaking psychological support at $100 and dropping to a 10-month low after CEO Bob Iger advised that fiscal year 2017 profits would be comparable to 2016 results, lowering previous expectations. The sell-off marks the next leg in a volatile two-year trading range that could eventually complete a long-term top, ending the stock’s multi-year bull market run.

The high-volume decline also signals rising concerns about Hurricane Irma’s destructive path, which could generate 100+ mile-per-hour winds over Orlando’s Disney World complex. Infrastructure breakdowns across Florida and around the hurricane’s path could reduce fourth quarter tourism, with battered hotels and damaged airports cutting into profitability while forcing shareholders to reconsider their investment options. (See also: Insurance Carriers Breaking Down Ahead of Irma.)

The exodus out of traditional broadcasting and into streaming entertainment is also weighing on longer-term expectations, with ESPN viewership in a persistent decline while ABC struggles to maintain viewership. Adding insult to injury, movie theaters just reported their weakest summer box office results in over a decade, exposing the once bulletproof Marvel, Disney, Pixar and Lucasfilm movie divisions to additional scrutiny.

DIS Long-Term Chart (1998 – 2017)

Disney stock topped out in the low $40s in 1998 following a multi-year uptrend and ground sideways into a 2001 breakdown that ended in 2002 at an eight-year low in the lower teens. It tested that level into the second quarter of 2003 and turned higher, gaining ground in a slow-motion uptick that stalled seven points below long-term resistance in 2007. The stock turned south with world markets during the 2008 economic collapse, testing the 2002 low and bouncing strongly into the new decade.

The stock completed a round trip into the 2007 high in May 2010 and broke out into 2011, stalling quickly at 1998 resistance. That formidable barrier ended the uptrend, dropping the stock into a deep slide that posted a long-term higher low in the upper $20s, while the subsequent bounce generated the most productive period so far this century, rising nearly five-fold into the August 2015 all-time high at $122.08. (For more, see: Behind Disney’s 240% Rise in 10 Years.)

Volatility then rose sharply, triggering a series of gut-wrenching buy and sell swings that have carved the outline of a complex trading range, with support in the upper $80s. Three tests at that level have found willing buyers since August 2015, while this week’s price action signals a fourth test that could complete a long-term top and a breakdown that signals the start of a multi-year downtrend.

DIS Short-Term Chart (2015 – 2017)

The stock has posted two lower highs since August 2015 while finding horizontal support near $90. This price action has carved the outline of a long-term descending triangle pattern that could generate intense selling pressure following a breakdown into the $80s. That decline could target the 2012 breakout level in the mid-$40s, signaling a high-profit setup for aggressive short sellers. However, bulls should have several opportunities to turn the tide in the coming weeks and generate another recovery wave into the triple digits. (See also: Disney-Netflix Divorce Signals Death of Cable.)

On-balance volume (OBV) since the middle of 2015 matches bearish price action, topping out and entering a steep distribution wave that paused at a multi-year low in October 2016. Bulls took control into the second quarter of 2017, when a major reversal undermined improving sentiment, triggering a fresh selling wave that is still in progress as we near the fourth quarter.

The current sell-off should slow or stall when the price reaches support at the 200-week exponential moving average (EMA) between $93 and $94, generating a bounce that could last into the early November earnings report. Interested short sellers should delay entries until that time, looking for a sell-the-news reaction that breaks the moving average and generates strong selling momentum through the two-year trading floor. (For more, see: Three Reasons Why Disney Doesn’t Need Netflix.)

The Bottom Line

Disney is spiraling lower in reaction to multiple bearish catalysts that could eventually end the long-term uptrend. However, the decline is already approaching weekly support in the low to mid-$90s, predicting a reversal that could mark a final stand for beaten-down bulls. (For additional reading, check out: Disney to Slash Workforce at Struggling TV Units.)

<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>