When investors get their first chance to act – or not act – on Disney’s (NYSE:DIS) earnings report after the bell Tuesday, they will decide which path to take the stock. Before earnings, shares traded slightly above technical resistance. If investors like what they hear then even the slightest price gain will result in a technical breakout.
On the charts, analysts see the zone between 40.50 and 41.00 as a crossroads. For the past year, it acted as a key chart level, first supporting the stock in early 2011 and then resisting it in July and again last month. In English, investors viewed this zone as being cheap and once broken to the downside when the market in general fell last summer it then was viewed as being expensive.
In technical analysis, this is a common occurrence. Investors who formerly bought dips at 40.50-41.00 – demand – were burned when the stock broke down last June. When it rallied briefly it met with increased selling – supply – and demand was not longer strong enough to soak it all up. Prices had nowhere to go but down.
It happened again last month. The stock met with selling pressure but unlike last year, it was much more resilient. And now, it is once again challenging this zone, suggesting that demand is ready to come out should earnings be positive.
To be sure, even a breakout now would not necessarily be the “all clear” signal. There is tremendous chart resistance – again, supply – at the top of last year’s trading range just above 44.00. But a run from 41 to 44 would represent a 7.3% gain and in a market as choppy as this one has been that is not too shabby.
Of course, if investors react negatively to earnings then the stock could once again be rejected at this zone. That could mean the end of the rally, at least for now.
Michael Kahn, CMT, writes the twice weekly Getting Technical column for Barron’s Online and publishes the daily Quick Takes Pro newsletter. Sign up for his free, no-spam technical analysis chart of the day at www.QuickTakesPro.com.