Chicken wings, just about every Sunday afternoon sports enthusiast loves them and according to some surveys not many places make them better than Buffalo Wild Wings (BWLD). Longer term this stock seems to be a further growth story as the company plans to open about 100 new restaurants in 2011. Short term however there may be a trade setting up to the downside.
BWLD has over the past 18 months traded well technically and displayed decent respect for its 50 sma (yellow line) both as resistance and support. No stock ever acts perfectly at the 50 day moving average, but BWLD seems to find it within itself to quickly make it clear to traders whether the 50 sma will be respected or not.
The most recent example was in April. After breaking out of a bull flag in late March, the stock came back to re-test the breakout level on April 12, which then also coincided with the 50 sma. Over the following two days the stock staged a good rally higher, making it clear to investors that this area would serve as support.
On June 3rd BWLD broke below an upward sloping support (blue line) and over the following days slide further and right through the 50 sma.
To emphasize the break of this upward sloping support zone, note the break on a weekly chart. The weekly bar not only broke this support trend but also engulfed the previous five weekly bars. Follow through to the downside was highly likely thereafter, and that is exactly what happened.
All of this gets us to the current level. After reaching a recent low on June 10th the stock rallied back up and into the 50 sma, where at least for now it has found resistance. The 50 sma also coincides with an exact 50 Fibonacci retracement of the move down from the highs of May 27th to the lows of Juen 10th. Last Thursday BWLS recorded a doji candlestick and on Friday tried to rally higher but closed the day with a bearish engulfing day. The combination of those two candles increases the likelihood for further downside.
If we take all the above mentioned factors together there seems a good chance BWLD will turn lower over the coming days. As usual, for more conservative traders another bearish confirmation bar would be favorable before entering short. However, for more aggressive traders an entry at or below $59.90, with a stop at $60.65 and a profit target at 56.60 sets up a favorable risk reward trade.
Should downside momentum increase, those traders willing to stay in the position can add a trailing stop. The uncertainty around the NFL strike (which would hurt BWLD’s business in the fall) would in my opinion allow the stock to drop as low as $54.
