Shares of toy company Hasbro, Inc. (NASDAQ:HAS) bumped higher Thursday, giving hope to momentum traders that the stock could soon resume its post-earnings rally.
However, those same traders should also note that HAS stock is flashing a host of overbought readings that could offer a great risk/reward opportunity to play the stock to the short side — particularly as the consumer discretionary sector is showing signs of exhaustion.
Hasbro’s first-quarter results featured top- and bottom-line beats. Revenue grew 5% year-over-year, and Hasbro repurchased around $25 million worth of HAS stock in the quarter, which certainly didn’t hurt investor sentiment.
Particularly in this late cyclical bull market, I like to focus in a stock’s sector strength/weakness, for on average that will also dictate the broader direction of the stock’s intermediate-term movement.
To wit, the consumer discretionary sector — after showing good absolute and relative strength in the first part of 2015 — recently began to negatively diverge, which can be seen on the below ratio chart of the Consumer Discretionary SPDR (ETF) (NYSEARCA:XLY). Ratio charts should not be underestimated; they provide perspective and clarity.
HAS Stock Charts
Looking at HAS stock from a multiyear angle, we see that a major hurdle of resistance (black horizontal) was overcome with vigor in October 2013. Once Hasbro shares climbed above this line of resistance, they then tested it as support several times until they lifted off into a vertical move in late 2014.
The steep rally, which at its peak in mid-April measured about 33% from the beginning of the year, has also dramatically widened its Bollinger Bands (blue lines on the below chart). On average, the more these bands widen, the higher the risk of an eventual mean-reversion snap-back move lower in the stock.
While that’s not an immediate-term sign to dump or short HAS stock, it is something that should be kept in mind for risk management purposes.
Sliding over to the daily chart, we see that HAS stock gapped higher by nearly 13% after the aforementioned April earnings report. The stock then slipped into a consolidation phase to work off the immediate-term overbought readings. The consolidation phase has come in the shape of a wedging pattern that gives traders well-defined levels of support and resistance, particularly if such a consolidation phase follows a gap up or down, such as is the case with Hasbro.
My favorite near-term moving averages — the eight- and 21-day simple moving averages — are also coinciding with the lower end of the consolidation phase, thus giving us a confluence area of support near the $70 mark.
A break below this area, particularly on a daily closing basis, could be the beginning of a better mean-reversion move lower that would as a first price target fill the April up-gap near $66, but could fall well lower than that.
On the other hand, should HAS stock continue to ascend and want to defy gravity a while longer, a push and hold above $72.40 could see the stock move into $76.
Like what you see? Sign up for our daily Beat the Bell e-letter and get investment advice delivered to your inbox every morning!
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.
More From InvestorPlace
- 9 Top S&P 500 Dividend Stocks for May
- 7 Best Stocks to Buy Now for Explosive Earnings Growth
- Timeline: How Avon Stock Went Berserk on Fake Buyout Bid (AVP)