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The Dip in Best Buy Stock Is Not An Endless Abyss

Best Buy (NYSE:BBY) reported earnings yesterday and after a brief pop, BBY stock fell and closed down 4.8% on the day. With that in mind, I want to discuss the support zone below and identify the potential trades from here.

First, let’s set the investing environment: So far, 2019 has been good to the indices which was a positive change from how 2018 ended with a crash into Christmas. However, this week it’s starting to feel like December again. But this time it’s different.

So let’s start with the macroeconomic picture. Companies are still delivering strong report cards but they are guiding cautiously because of geopolitics. So investors are hesitant to celebrate the actual results for fears of coming weakness.

This is the fault of the economic war that the U.S. and China are having and what makes it worse is that they are negotiating it in the public medium instead of how grown adults should do in a formal sit-down of leaders. Until the two presidents meet face to face, the stock markets will be a slave to the unpredictable headlines like we are having this week.

But as I stated above, this is not the same situation from December because this time the U.S. Federal Reserve is on the stock market side. Last year, they were part of the problem but since then they’ve flipped 180 degrees to the point that they are more likely to cut rates than raise them. So if the economy falters the Fed net is ready for us.

How to Approach BBY Stock

Best Buy stock came into the earnings up almost 30% year-to-date, so it can afford to lose a bit without changing the overall trend. Investors punished it hard but therein lies the pleasant surprise. After seeing management’s grim tariff warnings, I’d expect it to be down much more.

So this less dramatic reaction is the good news. But you shouldn’t necessarily catch this falling knife without some safety, or it could end up costing some digits.

Fundamentally, Best Buy stock is cheap from an absolute basis as it sells at a price-to-earnings ratio of 12X.

As for the business model, I am not a fan. I am a former engineer so I am a like tech. And I can’t even remember when was the last time I went to a BBY store. However, consensus on Wall Street is that consumers need to touch the tech before they buy it.

I see this as a minor selling point to it. So, for now, I bet they are still doing as well as they are because they are the only gig in town. I can find all I need at Amazon(NASDAQ:AMZN), Ebay (NASDAQ:EBAY) and Costco (NASDAQ:COST) or Walmart (NYSE:WMT).

Nevertheless, BBY management reported a decent quarter as they met or beat most metrics, including comparable sales, especially in the U.S. The problem came from the tone that management had for ongoing risks. The outgoing CEO Hubert Joly painted as dire a picture as can be with regards to the risks of the tariff war. He spoke of increased costs and their impact on shoppers.

This alone should have had a worse effect on BBY stock than it did … especially given that this happened on a very bad market day and while overall sentiment was negative. So the dip on Thursday came with as much force as it could have. This usually constitutes a legitimate test of support.

This is similar to what happened last Christmas when stocks collapsed on similar circumstances. So once this tizzy passes, BBY stock should have a great opportunity for a bounce. It is also important to note that finding perfect bottoms is rare, so I don’t suggest taking a full position all at once.

It’s best to start with one tranche and leave room to add at lower prices if the selling persists. Even then, you should also place stop loss levels that fit my personal preferences and tastes.

If you already own the shares, then this is not the time to panic out of them for as long as the reason you took the position is still viable. This depends entirely on personal preferences and time frames.

Technically, there are a few key lines to know. First, there still is an open gap to $61.50, so the selling could continue, especially if the overall market sentiment doesn’t improve. We are going into a long weekend and traders might want to flatten out for headline fears.

But this whole zone has been pivotal for months so it’s likely to be sticky. So I’d watch for a break below Thursday’s low at $64.4 and anticipate another wave lower if that happens.

Conversely, I shouldn’t expect an immediate reversal and rally. First, I need to see a bottom. Then a trend of higher lows to challenge the descending trend of lower highs. The buyers will probably not come in until they see a breach of these descending trend lines. So patience is important to avoid being too early. There will be resistance at $70 and around $75.5 once they get there.

Simply stated, the earnings selloff is testing Best Buy stock’s support. If it holds, then there is the opportunity to trade it from the long side like December.