Editor’s note: Serge Berger, the head trader and investment strategist for The Steady Trader, will be providing the Trade of the Day until Sam Collins returns on June 27.
Buffalo Wild Wings (NASDAQ: BWLD) – The restaurant franchiser could be a longer-term growth story, as the company plans to open about 100 new stores in 2011. In the short term, however, there may be a trade setting up to the downside.
Over the past 18 months, BWLD has traded well technically and displayed decent respect for its 50-day simple moving average (yellow line), both as resistance and support. No stock ever acts perfectly at the 50-day moving average, but BWLD seems to find it within itself to quickly make it clear to traders whether the 50-day SMA will be respected.
The most recent example of this was in April. After breaking out of a bull flag in late March, the stock came back to retest the breakout level on April 12, which coincided with the 50-day SMA at the time. Over the following two days, the stock staged a nice rally, making it clear to investors that this area would serve as support.
On June 3, BWLD broke below an upward sloping support line (blue line), and over the next few days, slide further and right through the 50-day SMA.
To emphasize the break of this upward sloping support zone, note the break on the weekly chart below. The weekly bar not only broke this support trend, but also engulfed the previous five weekly bars. Follow through to the downside was highly likely thereafter, and that is exactly what happened.
All of this brings us to the current level. After reaching a recent low on June 10, the stock rallied back up and into the 50-day SMA, where at least for now it has found resistance. The 50-day SMA also coincides with an exact 50% Fibonacci retracement of the move down from the highs of May 27 to the lows of June 10.
On Thursday, BWLD recorded a doji candlestick, and on Friday, tried to rally higher, but closed with a bearish engulfing day. The combination of those two candles increases the likelihood of further downside.
If we take all the above-mentioned factors together, there is a good chance that BWLD will turn lower in the coming days. As usual, for the more conservative trader, another bearish confirmation bar would be favorable before entering a short trade. However, for more aggressive traders, an entry at or below $59.90, with a stop at $60.65 and a profit target at 56.60, sets up a favorable risk/reward trade.
Should downside momentum increase, those traders willing to stay in the position can add a trailing stop. The uncertainty surrounding the NFL strike, which would hurt BWLD’s business in the fall, could, in my opinion, cause the stock to drop as low as $54.
