Monday, March 19, 2012

DIS: Breakout in the Magic Kingdom?

The Walt Disney Company (DIS) scarcely needs a description. It's about mouse ears, of course. And amusement resorts on both coasts, and in Paris, and Hong Kong, and Tokyo.

ABC is part of Disney (Hello, Dancing With the Stars!). Disney is books, and games, and action figures, and films -- it would take a fairly lengthy post to do justice to Disney's holdings.

Basically, Disney is money and a lot of savvy when it comes to marketable entertainment.

DIS had the most bullish chart of 16 stocks selected at random from 675 large-capitalization companies. M was the runner-up. BIIB and MTB completed the final four.

The analyst consensus is that DIS is a moderate buy, and the chart certainly supports that consensus.

The stock price has been stair-stepping upward since the October 2011 low of $28.19. The most recent leg up began Feb. 3 at $39.43 and peaked at $44.08 on March 13. In the four days thereafter, the stock has traded within a narrow range.

That pause came at a major resistance level that has been tested time and time again by DIS. It's as though the Magic Kingdom has found it's Magic Stopping Point.

The stock drew back after touching $44.34 in February 2011, after touching $43.88 in May 2000, and after touching $42.79 in May 1998.

So the failure to move persistently above the roughly $44 mark is a big deal, and a persistent rise above $44.34 would be equally big.

That's a wordy way of saying that DIS is poised for a breakout of epic proportions, without drawing conclusions about how likely that breakout might be.

Each test of that level has been followed by a fairly sharp pullback. So for me as a trader, it's a question of confidence that I can get out before too much damage as been done. The prudent trader would wait for the breakout to occur, but the prudent trader would then miss some potentially tasty profit.

DIS has return on equity of 13%, which is below growth-stock territory but still quite good. Long-term debt amounts to 39% of equity, a bit high but not too much of a problem for short-term trading.

Institutional ownership, at 65%, is slightly below the top rank. It takes $1.89 in shares to control $1 in sales -- not a huge bid-up but enough to show that someone out there is interested.

With average volume of 8.8 million shares, DIS has a full selection of options with high open interest and narrow bid/ask spreads.

Implied volatility, at 0.1983, stands at historic lows and has been declining, with interruptions, since last October. At that level of volatility, there is a 68.2% chance of prices closing between $41.03 and $46.01 a month from now.

With volatility that low, I would want to go with a long positions, such as buying call options.

As a diagonal spread, the best I can do for DIS is long the July $40 call and short the April $45 call, for a maximum return of 13% and a risk/reward ratio of 7:1. I generally like to keep my risk/reward ratios at 4:1 or below, and I can get better return elsewhere.

Decision for my account: I've bought calls on DIS, with a $40 strike and July expiration. I could have done a long vertical spread to define my potential loss, but I'm willing to rely on my trade-management skills to mitigate a downturn.

I screened the stocks using a tourney bracket with a one-month daily chart and a three-day half-hour chart, and then turned to a five-year weekly chart for the broad context in analyzing the bracket winner. See my essay "10,000 Charts" for a discussion of my screening methods.
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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