Best Buy Co Inc (NYSE: BBY) delivered a surprise Q2 earnings beat last week that sent the company’s share price surging 19.6%. If you’re kicking yourself for missing out on the Best Buy trade, you may have a second chance to go long Best Buy in the weeks ahead.
When Best Buy delivered Q2 EPS and revenue of $0.57 and $8.53 billion compared to consensus expectations of $0.42 and $8.40 billion, the stock shot up nearly 20% in a single day. That huge move left a large gap in Best Buy’s chart. Technical analysts know that the market tends to fill in gaps over time.
Gap traders are always on the lookout for big moves like the one Best Buy made after it reported earnings. There are two legs to Best Buy’s potential gap trade. First, traders can short the stock with a target price of either $35.46 or $33.60. The $35.46 level represents the stock’s August high and its highest pre-earnings price since October 2015. The $33.60 level was Best Buys high of the day on the day before the gap-up.
The second leg of the gap-fill trade would be to buy the stock in the $33-36 range. Best Buy bulls that missed the move can use that level as a buying opportunity. Once a stock fills a gap in its chart, it often resumes its previous uptrend.
In addition to the gap-fill pressure, Best Buy formed another bearish technical pattern in its charts shortly after its earnings spike. On August 24, the day after its big gap-up, Best Buy opened at $39.20, pushed up to a new 52-week high at $40.58 then pulled back to close at $39.50.
It’s not perfect, but the stock nearly formed a pattern known as a tombstone doji. In a bar chart, a tombstone doji forms when a stock spikes much higher than its opening price throughout the trading day but then gives up all its gains to close back near its opening price.
Like its name implies, the tombstone doji is a bearish formation and often marks a top in a stock’s chart.
Admittedly, Best Buy’s tombstone doji isn’t perfect. But the price action certainly seems to suggest that the stock ran into heavy selling pressure above $40.
If Best Buy continues to pull back after August 24, expect the stock to at least fill its gap down to $35.46. In the $36 to $33 range, Best Buy bulls and gap traders alike should consider buying the stock.
Disclosure: the author holds no position in the stocks mentioned.
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