Up until Tuesday, consumer electronics and appliances retailer Best Buy (BBY) was the top-performing stock in the S&P 500 this year, surging roughly 275% in 2013.
However, all steep slopes eventually show some mean-reversion — just look at Tesla Motors (TSLA) as proof. For BBY, it began after Tuesday’s earnings release. The company reported net income of $54 million, or 16 cents per share for the third quarter. This compares favorably to the same period one year ago when the company reported a loss of $10 million. The report also beat analyst expectations of 12 cents per share.
So far, so good. But investors’ mood soured when they saw the company’s outlook for its fourth quarter, where it forecast a meaningful squeeze on profit margins in an effort to lure shoppers to the stores with great deals. As a result, BBY fell close to 11% on Tuesday on a big spike in volume, damaging its short-term bullish chart.
From a longer-term point of view, Tuesday’s sharp drop merely pushed BBY back to a multi-year level that had acted as resistance until October. That means the stock is now re-testing its breakout point.
From a technical point of view, this is nothing but constructive work. However, given the sharp run-up that BBY has seen in 2013, a consolidation phase could easily push the stock another 10%-15% lower before finding better footing. To map out more exact areas of interest, let’s look at the daily chart for BBY.
Tuesday’s sell-off was sharp, came on big volume, and marked a breakdown gap. However, as with the weekly chart, Tuesday’s sell-off came to a halt at a first level of support, which on the daily chart was its 2013 up-trend line. Given the momentum behind the selling, this is not a good risk/reward point to buy into the stock, as any further drop in the stock could easily bring it down toward the $35 area.
The trade in BBY now is one of two time-frames. Quicker traders looking to jump on the back of this downside momentum could try a cute short on hopes of a break of the 2013 trend line. Beyond that, the more patient trader and investor will likely want to see this stock show better stabilization, either near Tuesday’s lows or closer to the $35 level, before making any long-side bets. Allow emotions to settle before touching this stock again on the long side.
Learn more about the strategies Serge Berger uses to create profits in the market every day. Download his trading plan in the Essence of Swing Trading e-book by clicking here. As of this writing, he did not hold a position in any of the aforementioned securities.