I love stock charts because of everything they can tell us about a stock. The history gives us a clue about what to expect in the future, including points of resistance and support, and how a stock may act when it runs up against special trading circumstances.
It can tell us to expect the, well, expected, or it can tell us to ignore certain things that would typically spell disaster.
That last situation is what we’re seeing now with Walt Disney Co (DIS). It’s nearing overbought territory, which is considered a sell signal for many traders. But after looking at the long-term chart, I actually think otherwise.
Disney recently broke out to a new three-month high after trading within a narrow range since the beginning of March. After remaining stuck between $96 and $100 for seven weeks, the bulls took control of the chart and pushed DIS through the upper end of the range, turning resistance into support and creating a buy signal.
Naturally, the buyers rushed in.
The DIS Stock Charts
But now that the stock is back at levels not seen since the start of the year, it appears that the breakout could be running out of steam.
The relative strength index (RSI), which is an overbought/oversold oscillator, is currently at 70, suggesting that DIS is overbought in the near term. When this happens, there’s no doubt that traders should keep an eye on the stock. However, it is not the be-all and end-all.
While the above chart focuses on Disney stock’s current trading, the chart below takes a step back to look at the stock from a longer-term perspective. As you can see, DIS was in a similar position in October 2015, once again trading right around $100 when the RSI moved into overbought territory.
But instead of pulling back, the shares rallied more than 15% before running into resistance at the $122.08 all-time high, where it formed a double top.
So if history repeats itself, we may be looking at another couple weeks of upside.
There is some concern regarding the 200-day moving average (the blue line on the chart above). Stocks tend to find support or resistance around this long-term indicator, but action over the last year suggests that the 200-day isn’t the best buy or sell signal for this stock. As you can see above, DIS didn’t even flinch after breaking through the indicator in October, so I don’t consider it a major factor in the current breakout.
From a fundamental perspective, Disney stock shouldn’t have to deal with any big headwinds until the company reports earnings on May 10. A poor report is what kicked off the last sell-off in late 2015, but I expect to see better results this time around as the new Star Wars movie has set records and the worries surrounding ESPN have moved to the backburner.
Bottom Line for Disney Stock
I believe all the bad news has already been priced into this stock at current prices, and unless the company’s earnings report disappoints again, we may even see DIS retest its all-time high by the middle of the year. That would be the third time this stock has tested those levels, which would call for a complete reevaluation of both the stock and its chart.
From here, I think we’re looking at a run toward $108 and then to $115 in the coming weeks as long as the new support at $100 holds strong.
As of this writing, Matt McCall did not hold a position in any of the aforementioned securities.
