Walt Disney Co (NYSE:DIS) was trading down more than 4% on Tuesday after a bullish day in the general markets, where the S&P 500 shot up 1.66% higher, causing the entertainment giant to close the trading day up over 3%.
Disney’s been trading in a fairly consistent long-term downtrend, which has brought the stock down more than 50% from its all-time high of $203.02 printed on March 8, 2021, to a low of $99.47 on May 12. On May 23 and Tuesday, Disney bounced up off the $100 mark, which may have created a bullish double bottom pattern on the daily chart.
A double bottom pattern is a reversal indicator that shows a stock has dropped to a key support level, rebounded, back tested the level as support and is likely to rebound again. It is possible the stock may retest the level as support again creating a triple bottom or even quadruple bottom pattern.
The formation is always identified after a security has dropped in price and is at the bottom of a downtrend whereas a bearish double top pattern is always found in an uptrend. A spike in volume confirms the double bottom pattern was recognized and subsequent increasing volume may indicate the stock will reverse into an uptrend.
- Aggressive bullish traders may choose to take a position when the stock’s volume spikes after the second retest of the support level. Conservative bullish traders may wait to take a position when the stock’s share price has surpassed the level of the initial rebound (the high before the second bounce from the support level).
- Bearish traders may choose to open a short position if the stock rejects at the level of the first rebound or if the stock falls beneath the key support level it created the double bottom pattern at.
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The Disney Chart: On May 20, when Disney first tested the $100 area as support, the stock negated its current downtrend by forming a higher low above the May 12 low-of-day price. Although the stock hasn’t reversed course into an uptrend yet, if the double bottom pattern is recognized, Disney may rise up to print a higher high above $106.03, which would confirm a new uptrend.
- The move lower on Tuesday came on lower-than-average volume, which indicates fear hasn’t gripped Disney traders and investors at its current price. As of press time, only about 7.16 million shares had exchanged hands compared to the 10-day average of 17.26 million.
- At least a bounce to the upside is likely in the cards over the coming days because Disney’s relative strength index is measuring in near oversold territory at about 32%. The stock has also developed exaggerated bullish divergence on the daily chart, because although the stock’s lows have been flat while Disney’s RSI has been making a series of higher lows.
- Disney has two gaps above on its chart, with the first gap between $133.93 and $135.13. Gaps on charts fill about 90% of the time, making it likely Disney will trade up into the range in the future, although it could be quite some time before that happens. If Disney rises up to fill the gap, it would indicate a 35% increase from the current share price.
- For both bullish and bearish traders, the $100 level is highly important. If Disney holds above the level a reversal to the upside is likely in the cards and if the stock falls below the level with momentum, a fall to a new 52-week low is the most likely scenario.
- Disney has resistance above at $108.50 and $115.76 and support below at $100 and at the 52-week low.
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Photo: DANIEL CONSTANTE via Shutterstock
