Shares of consumer electronics retailer Best Buy Co Inc (BBY) rallied nicely this holiday shopping season along with the broader consumer discretionary sector. However, while some discretionary stocks have likely gotten ahead of themselves on both valuation and technical perspectives, BBY stock still offers some well-defined risk and reward.
Since Best Buy reported earnings on Nov. 20, news flow has mostly centered around analyst comments and ratings. Q3 earnings came to 32 cents, beating estimates by a wide margin, and revenues of $9.38 billion beat the Street’s expectations for $9.06 billion. Those sales were flat, though earnings were up a whopping 78% year-over-year.
On the back of this, a number of brokers upped their targets for BBY stock. For example, Credit Suisse maintained its “outperform” rating but raised the price target from $40 to $45.
On Dec. 29, some notable options activity was detected whereby a trader bought 8,585 contracts of the Feb $40 call above the ask price, indicating someone was giddy to participate in upside.
BBY Stock Charts
Looking at the technical side of things, we see on the weekly chart that BBY stock, after a steep 2013 rally, bumped into diagonal resistance (black line) that stretches back to 2006. Best Buy then dropped sharply but briefly in early 2014 before climbing again for the rest of 2014.
The logical upside attraction point now is this black diagonal resistance line, which currently comes in around the $42 area, or roughly 7% above Tuesday’s closing price of $39.38. From a momentum perspective, the Relative Strength Index (RSI) at the bottom of the chart still is nicely curling higher and has further room to the upside until it reaches overbought readings.
On the daily chart, the low for BBY stock in mid-October bounced it right off the 200-day simple moving average (red line), and given the sharp rebound, brought it back above its 50-day SMA just four trading days later. In mid-November, Best Buy gapped higher after the earnings report, but this up-gap was fully retraced by early December as the broader stock market pulled back.
The rally in recent weeks then brought BBY stock back up to its late-November highs, and the way in which it has been consolidating in recent days increasingly speaks to further upside in coming weeks as we enter 2015.
Active traders and investors could look to buy BBY stock near $39.90 for a move toward $42. Any break below $38.20 at the latest would nullify the setup for the time being.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.
