Shares of consumer electronics retailer Best Buy Co Inc (NYSE:BBY) have rallied sharply off their August lows along with the broader market. During the past few days, the stock has cooled off some and is working off some of its near-term overbought readings just in time for a seasonally favorable period for the stock.
While it doesn’t work every year, holiday-shopping-exposed stocks like BBY stock have a tendency to rally from the second half of September into mid- to late November. Active investors could look to play Best Buy stock to the upside upon further consolidation in price.
Playing seasonal patterns in stocks, commodities and even currencies is a strategy that many professional investors follow. Like anything, there is no guarantee that a historical seasonal pattern plays out the same each and every year, but the tendency for history to rhyme is appealing to investors and puts the odds in their favor more often than not. At the end, however, it all comes down to risk management (how well one adheres to stop-loss orders and position sizing).
Looking at the 10-year chart of BBY stock, we see that unlike the broader stock market, it actually made a notable lower low in 2013 that undercut its financial-crisis lows from 2008. Since then, however, the stock has exhibited some notable strength that resulted in two higher lows: February 2014 and August 2015. These two higher lows are now pushing Best Buy stock up against a diagonal resistance line that stretches back to the year 2006.
To be clear, I don’t expect BBY stock to materially break above this trendline, but rather see it as an attraction point for the time being.
If we zoom in on the daily chart, we see that BBY stock from its year-to-date highs in March down to its lows in late August formed what we refer to as a falling wedge pattern (black lines). After falling below this wedge pattern on Aug. 24, Best Buy shares gapped higher in a big way the next trading day on Aug. 25. By so doing, they out of the falling wedge pattern to the upside with a so called breakaway gap.
This move also immediately pushed the stock above its yellow 50-day moving average and within a few more days also overcame its 100- and 200-day (blue and red lines, respectively) moving averages.
Considering that I still think the broader stock market has some further downside in coming weeks, I don’t want to jump into BBY stock just yet. If the stock can retrace lower back to the $35-$36 area and hold above its 50- and 100-day MAs, I will be looking out for bullish reversals to buy the stock for a move back toward the $39-$41 area into mid- to late November for some early Christmas cheer.
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Successful trading and investing starts with a plan. Download Serge’s essential trading plan, The Essence of Swing Trading e-book. As of this writing, he did not hold a position in any of the aforementioned securities.
