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TECHNICAL ANALYSIS


Disney: No Reaction To Positive News

07/11/06 03:20:00 PM
by Paolo Pezzutti

Although the stock presents good relative strength, it is likely to enter a consolidation phase in the short term.

Security:   DIS
Position:   N/A

A record-setting opening weekend for Walt Disney's movie Pirates Of The Caribbean 2: Dead Man's Chest prompted new optimism on Monday for the entertainment giant on Wall Street. The movie scored a record $132 million total take from Friday to Sunday, easily surpassing the previous record, the $115 million earned by Spider-Man in 2002 in its opening weekend. According to press sources, Pirates could lead to another three cents of earnings-per-share upside for fiscal 2007, on top of the nine cents of upside projected just last week for Disney (DIS).

On the stock market, the news did not lead to particular gains. In fact, on Monday the stock closed up only 0.30%. During the past three years, prices doubled and are now at the highest level since 2001.


FIGURE 1: DISNEY, WEEKLY. The stock is close to the resistance level of $31 and the MACDDiff indicator is printing a negative divergence.
Graphic provided by: StockCharts.com.
 
At the weekly level (Figure 1), prices during the past three years moved upward in a positively inclined channel. Prices are still testing the resistance at $30-31. In this time frame, the oscillators, the stochastic and the RSI-stochastic, have left the overbought area. MACDDiff is printing a negative divergence with respect to the top of the beginning of June. You can see that prices, since the beginning of 2006, have successfully tested the 20-week moving average already three times. The stock is doing well in a moment of weakness of the stock market, presenting good relative strength. So far, however, opening a long position does not offer a good risk-reward opportunity. Prices are close to the resistance of $31. In addition, the indicators provide a general framework of risk to the upside.

FIGURE 2: DISNEY, DAILY. The stock is in the upper part of the trading range, displaying low momentum. The scenario favors the development of a consolidation or lateral phase.
Graphic provided by: StockCharts.com.
 
At the daily level, in Figure 2 you can see that the stochastic and the RSI-stochastic have just left the oversold area. MACD, during the rebound from the mid-June bottom, has printed very low momentum. To partly recover the steep 10% selloff of the beginning of June, developed in only four bars, the stock has taken so far 16 days. Since last February, the stock has tested successfully the 50-day moving average three times. Disney is now in a short-term congestion right above the 20-day moving average--difficult, if not impossible, to establish if the move to the upside will be resumed or a correction will be developed.

Chances are, however, that even if prices manage to continue to the upside to test the previous high, the present conditions do not favor the scenario of a successful breakout. DIS is likely to see the development of a temporary consolidation phase. In addition, today's reaction to positive news reflects the sentiment that the present price levels have already incorporated the good earnings forecasts for the next quarter. Therefore, in this specific phase, I would wait for the stock to move toward the support area of $28 in order to spot a low-risk entry point (should a short-term reversal pattern develop) instead of trading the resistance breakout.



Paolo Pezzutti

He is the author of the book "Trading the US Markets - A Comprehensive Guide to US Markets for International Traders and Investors" - Harriman House (July 2008)

Rome, Italy
E-mail address: pezzutti.paolo@tiscali.it

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Date: 07/12/06Rank: 3Comment: 
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