Nadim,
Good morning to you as well.
I just took a look at the updated chart on BBY. The technical divergence continued on December 20 and is giving me confidence that I will come out of this trade ok. But I admit that this is a much more risky trade than I would normally enter into and I may very well lose money on it.
RE the divergences:
The daily RSI has remained flat at 23 for the past three trading days. During this period, BBY closed at 11 7/8, 11 1/4, and 11. So the stock price declined each day but the RSI was unable to break to a new low. This is no gurantee that the stock will bounce, but it is usually a very good indicator.
The weekly RSI is also showing a bullish divergence. Here is the data:
The week ending December 6, BBY closed at 12 7/8 and the RSI was 8.
The week ending December 13, BBY closed at 13 3/8 and the RSI was 17.
The week ending December 20, BBY closed at 11 and the RSI was 18.
The week of December 13 was an "inside week", meaning that the stock didn't trade higher than the previous week's high, nor lower than the previous week's low. Last week, the stock made a new low, but the RSI continued higher. Usually when the price of a stock slopes down and the RSI slopes up, it indicates that price is about to break out of a decline.
So where is my target? I think there will be inital resistance near the lower daily bollinger band. Currently this is near 12. If the stock gets through 12, then my next target would be the middle daily bollinger band near 13 3/4. If the stock breaks to a new low below 11, it's anybody's guess. I don't know how to find support for a stock using charting methods when it is trading below support on the daily, weekly, and monthly charts.
The best I can offer if it breaks 11 is revert to simple charting methods to see what level offered support in the past. Right now, this is 11 because there were several months in 1993 when the stock made lows in this area. If this fails, then the next support level on the chart is between 5 and 6. But my guess is that the floor on this stock can't be determined by charting methods because the lows at 5 and 6 were too long ago (1992). Therefore, I will revert to some fundamental analysis to try to guess the bottom. My guess is that the bottom should be guestimated by looking at the book value plus an allowance for good will. The name "Best Buy" has value, IMO, that doesn't show up on the balance sheet. My guess is the absolute bottom is near 8--just a swag.
Dan |
