Best Buy (BBY), the world’s largest electronics chain, reported less-than-juicy holiday sales Thursday, causing BBY stock to literally collapse as it snapped every last support line in one fell swoop.
I routinely discuss how, for traders, holding a stock through major announcements is a risky play, and over time doesn’t add up to any good P&L — yesterday’s price action in BBY stock is a great example for that.
Specifically, Best Buy came in with sales of $11.45 billion during the nine-week holiday sales period that ended Jan. 4 — a figure that was shy of the $11.75 billion generated in the year-ago quarter, and a figure that took analysts and investors by surprise. Furthermore, domestic same-store sales slipped 0.9%, and BBY expects fourth-quarter operating margins to be and the company projects fourth-quarter operating margins that’ll be lower by about 175 to 185 basis points year-over-year.
The slump in holiday sales came despite a significant 23.5% rise in online sales to $1.32 billion, up from $1.1 billion in the same period last year.
The Best Buy bloodbath finished with BBY stock closing lower by 28.6% — or put differently, the stock lost nearly a third of its value in one day. Risk happens fast, as they say, and a down day like Thursday has significant implications on all time frames in the charts.
To understand the significance of Thursday’s decline in BBY stock, we need to look at the longer-term weekly chart, stretching back a good eight years. Since a top in the first half of 2006, BBY stock through this lens has essentially formed a series of lower highs and lower lows, as indicated by the black downtrend line. In October 2013, Best Buy’s stock successfully completed a break past the downtrend, which was bullish until it was proven a liar on Thursday. The breakout was a significant fake-out move and now calls for some major consolidation time, which likely has lower price levels to test still.
On the daily chart, Thursday’s selling caused BBY stock to instantly snap below its 200-day moving average (red line) and retraced more than 50% of the entire December 2012-November 2013 rally. Simply put, big down days like this usually see follow-through selling in coming days or weeks before the stock settles into a better bottom-building phase.
Thus, from where I sit, although the stock could bounce somewhat in the immediate term, I now wouldn’t consider buying BBY stock — at least not until it can prove to me via price action that it can once again behave like a grown-up, stop throwing fits (i.e., tanking 30% in one day) and work itself higher in a more orderly fashion.
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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.