Bed, Bath, and Beyond Punished After Third Straight Earnings Miss

The third quarter earnings release on 21 December for Bed, Bath, and Beyond (NASDAQ: BBBY) was anything but pretty.  The troubled owner of over a half-dozen names including Christmas Tree Shops and the Bed, Bath, and Beyond retail store posted an earnings miss of $0.13, and a revenue miss of $50 million.  In the last twelve quarters, only two have been positive reports.  The stock plunged 10%, following what may turn out to be a breakaway gap, and has since formed what appears to be a bear pennant, signalling more trouble may be ahead for the already battered stock.

BBBY Daily Chart

The two-day flagpole and subsequent pennant signal another down more in the short term, and that move would have a conservative price target in the $36.50 range.  The signal for a short entry would be a close below the horizontal pennant bottom with confirming volume.  The only support to speak of below that pennant is the low of the prior move, which ended on 4 November.

The RSI(9) oscillator appears to agree with continued weakness, although it's not doing so with much enthusiasm.  There's a bearish divergence line along the highs, however that prognostication likely completed with the strong downward move after 12 December.  The lows, however, are flat.  That's slight bearish since the last low on the chart was higher than the prior one, but as divergences go, it's a pretty flimsy signal.

Volume is also giving us a bit of a warning sign.  The rising volume into earnings coupled with the extreme volume on earnings day is symptomatic of climactic action.  Indeed, in the days after the earnings announcement, the stock traded sideways, not down.  Volume on the two up-days was high, while volume on the last down day was low.  Look at the volume today (29 December.)  That's higher than average volume on an up-day with a very narrow range candle.  A lot of shares changed hands, today, but the stock didn't go very far.  That's indicative of institutional activity since retail traders can't generate that kind of volume.

The bottom line here is that the daily chart shows a potentially bearish pattern - the bear pennant - but all other signals are warning us that there may not be much more room to the downside.  With that in mind, we'll take a look at the weekly chart and see if it can shed any more light on the situation.

BBBY Weekly Chart

The first thing that leaps out on this chart is the distinctive Head and Shoulders pattern that spanned mid-2012 through the end of 2015.  Both shoulders are well formed, and the neckline is as close to horizontal as you're going to get.  Chartists are well aware that the Head and Shoulders pattern is a major reversal pattern, so longer term traders - those that play on the weekly charts - would have traded this to the short side with several potential entry points depending on the type move they were trying to capture.

I show the Fibonacci target levels with the numbers directly below the low of the neck.  With that final thrust down on 31 October 2016, the 61.8% extension was reached, and that's a very frequent target level for the Head and Shoulders pattern.  While it could still trade up to the remaining 38.2%, that's not something I'd factor into any additional analysis.  We'll consider this pattern complete as it is, and the price target as met.

What we can glean now from the weekly chart is that we've been in a relatively tight consolidation pattern since February.  A bearish diagonal trend-line was breached during earnings week, however the trend-line was a bit weak, so I don't think I'd give it much weight.

It's possible that the leg down from the right shoulder was a Wave-1 impulse, and if that's the case, then the horizontal pattern that followed would be Wave-2.  If that's the case, then there's plenty of room to the downside from here with two more impulse waves to follow.  These are long-term patterns on this chart, though, and are well outside our trading horizon.  What may be of significance, though, is that - in an X-Y-Z correction (which the pattern appears to be drawing on the weekly chart) the next leg from here is up.  That would be a potential 4 to 6 week move - longer than our trading style - but it does give us some direction as to what BBBY may be headed from here.

What seems obvious is that there's a lot of demand coming into play as the stock reaches the bottom of the current pattern.  If we do trade to the short side, we need to ensure that it's with very tight protective stops.  The 31 October lows may very well be the low - or very near the low - of the consolidation pattern.

We'll watch the daily chart's bear pennant carefully.  To enter a short trade, we need to see volume confirm the move.  We also need to be cognizant of a potential bear trap.  The weekly chart is warning us that an apparent break to the downside may actually be an institutional move to scoop up sell stops just below the pennant low. 

An upside break may also be a profitable play.  If it breaks to the upside (with confirming volume) the bullish diagonal resistance line is a likely target.  That line runs through the middle of the gap, but when we look at the number of touches that line has endured since it formed on 23 June, we have to respect the strength and significance of that resistance level. 

Watch the development of this pattern over the next couple of trading days.  Being nimble in this case, would be wise.  It can break in either direction, and we need to ensure we have a strategy that accounts for both.

Happy Trading.