Bears have moved into the Mouse House, and they’re wrecking the place! Since topping earlier this year at $116.10, Walt Disney Co (NYSE:DIS) shares have tumbled 15%. Emboldened by deteriorating earnings, sellers have wrested control of DIS stock’s trend. The struggling entertainment titan now finds itself steeped in a downtrend beneath all major moving averages.
And this week’s bounce? I suspect it’s one of the dead-cat variety, particular considering the heap of overhead resistance.
Last week’s sucker punch came courtesy of dour comments from CEO Bob Iger regarding weaker-than-expected earnings this year. And that was after an already painful down gap following last month’s earnings release. Apparently, DIS stock hadn’t been punished enough.
A glimmer of hope has arisen in the form of a respectable four-day rally, but I suspect the strength is a ruse, a mild bit of profit-taking by short sellers sated by last week’s bloodletting. Once their buying (to cover) is finished, Disney shares should continue its downward spiral. Selling rallies is nothing new, mind you. It’s the name of the game for trend-following folk like me.
Should the DIS rally persist for a few days yet, resistance awaits near $100.50. This level was a significant prior support level which, when broken, led to last week’s epic swoon. And as any good chart reader knows, old support tends to morph into new resistance.
What’s more, the 20-day moving average rests near $100.50, so the price zone is doubly significant.
Here’s How to Profit
Disney stock options boast decent premiums right now. The implied volatility rank is sitting at 35%. To capitalize, and to create a high probability of profit, sell the Oct $100/$105 bear call spread for around $1.
Think of this as a bet that DIS stock will be below $100 at expiration. If it is, then you will capture the max reward of a dollar. The potential risk stands at $4 and will be forfeited if the stock rises above $105.
To minimize the damage, I suggest exiting on a break above $102. That will invalidate the recent breakdown and put into question the sustainability of the downtrend.
As of this writing, Tyler Craig held bearish trades in DIS. Want to learn how to master the art of option selling for high-probability cash flow? Check out Tyler’s recently released video series through Tackle Trading on how to systematically sell iron condors for monthly income.
