Media stocks took a tumble this week after Time Warner, Inc.’s (TWX) Turner broadcasting division reported an unexpected contraction in quarterly ad revenues. Dow component Walt Disney Co. (DIS) turned south at a 17-month high and fell nearly 5% in two sessions, in a decline that also marked a delayed reaction to last week’s ESPN layoff announcement. The double whammy sets the stage for higher than normal volatility into the entertainment icon’s May 9th earnings report.
A 2015 viewership decline at the popular cable network shattered a long-held belief that sports programming was immune to the cord-cutting phenomenon. Disney stock fell sharply after the mid-summer disclosure and still hasn’t fully recovered, stuck in a broad trading range despite a long string of theatrical mega-hits and solid profits at its popular vacation venues.
It will need to calm nervous investors at next week’s confessional or risk lower prices that eventually complete a long-term topping pattern. Fortunately for bulls, the movie division has already struck gold in 2017, with Beauty and the Beast earning more than $1.14-billion worldwide. However, a single bomb could undermine sentiment, with May’s Pirates of the Caribbean sequel capable of filling that requirement due to Johnny Depp’s slumping popularity.
DIS Long-Term Chart (1994-2017)
The stock gained ground throughout the 1990s propelled higher by an animation renaissance that generated a long string of box office hits. It split twice during this fruitful period, which finally ended in the lower-40s in April 1998. A decline into the 20s got bought, ahead of a bounce that tested resistance in 2000. Sellers took control at that level, generating a downtrend that continued into the 2002 low at $13.48.
An uptick into 2007 unfolded in two rally waves that stalled more than 7-points below multi-year resistance, ahead of a 2008 decline that held support at the Dot.com bear market low. This relatively strong performance set the stage for a V-shaped recovery that reached the 1999 high (blue line) in 2011. The stock broke out one year later, entering a trend advance that posted an all-time high at $122.08 in August 2015, one day before the ESPN disclosure.
Post-news selling pressure eased at $90.00 after the August 2015 mini flash crash, giving way to seesaw price action that’s generated a number of volatile swings within a broad trading range. The most recent rally wave reversed last week at $116.10, right at the .786 Fibonacci retracement level of the two-legged decline into 2016, exposing the stock to continued downside that tests the red rising lows trendline.
DIS Short-Term Chart (2015–2017)
The stock carved a V-shaped recovery after the summer 2015 plunge and sold off once again, posting a deeper low in the first quarter of 2016. A higher October 2016 low and lower April 2017 high has drawn the outline of a broad symmetrical triangle pattern with support at $95. Bulls need to defend intermediate support at $105 to avoid a trip down to that level and possible breakdown that signals the start of a secular downtrend.
On Balance Volume (OBV) peaked in the middle of 2015 and entered a ferocious distribution wave that continued into the fourth quarter of 2016. The rally into April 2017 failed to lift the indicator within range of the two 2015 highs (black lines), signaling a bearish divergence that reflects inadequate institutional sponsorship, with many funds choosing to stand aside due to growing risk at the company’s broadcast divisions.
The Bottom Line
Walt Disney heads into first quarter earnings on the defensive after a vertical decline that reflects well-justified fears about declining broadcast revenues. The company’s film division is unlikely to cancel out this cord cutting paranoia because the business segment is already priced for perfection after a string of billion dollar box office hits.
<Disclosure: the author held no positions in aforementioned stocks at the time of publication.>