Part 3 in the ongoing “Power of Technicals” series is BBY.
Another higher probability set-up with large profit opportunities in compressed time and clear risk control parameters.
Fundamentally speaking, is BBY really any different from Circuit City of days past or RIMM and NOK today?
All three are relics of times past – business models that are now arguably completely antiquated.
Technically, it appears BBY just broke important long-term support (1) to fall back into a channel that’s been in place since the early 90s.
At the same time, the stock is forming a flag pattern b/t lines (3) and (4) and the inset of (A).
A break below the flag implies a hard and fast fall, similar to RIMM for a few reasons:
1) Note that at regions (B)-(C), BBY has virtually no trading history or support
2) A break below (C) implies (D) where there is a sizable gap to fill at 12.50.
3) Should (D) give way note that the last time BBY hit the bottom of the channel it just re-entered it took a mere 13 months at (E) to rally to the top and out of the channel – a break below (D) could imply something similar to line (2).
Assuming all of this could take 12-18 months BBY could be trading in the low $4 region at line (F) where the next gaps to fill are located.
We would want to play a short position in the name and/or deep out of the money put options expiring in late 2013 and/or early 2014, preferably with strike prices in the high single digit range with the expectation that the combo of these acute technical conditions combined with rapidly deteriorating industry/company fundamentals could send the stock to the ~$4-$5 range in short order, similar to declines seen in RGR and RIMM recently.
From an execution standpoint, these positions are best built on a rally in BBY back to lines (1) and or (3), which are strong resistance. A multi-%, week-long break above line (3) would be a good stop point on the trade.