Has Disney Lost Its Magic? Hedge Fund Trading Strategy Featuring Brett Favre

The Walt Disney Company DIS has been on a magic carpet ride and currently sits near its 10 year high. This fairytale of a stock has name brand recognition and box office appeal. You love it, your kids love it and guys secretly love it. But has Disney lost its magic?

Today's installment from the series, 'Trading Lessons From A Hedge Fund Trader' will focus on Brett Favre's career and The Walt Disney company DIS as per our reader's request for research, available here on BehindWallStreet.com. 

Watching Brett Favre was purely entertaining as he was always one play away from a highlight or a train wreck. 

Brett Favre, 'The Gunslinger' is statistically the greatest QB of all time. He holds many NFL records, including most career TD passes, interceptions, passing yards, passing attempts, interceptions, consecutive starts, victories, most sacked and most fumbles.

The Peyton Manning article was a hit with our readers at BehindWallStreet.com so I've decided that I will try to write 1 NFL article every week while it is still football season.

This article is dedicated to Peter, one of our many reader's from Down Under, he is an intern at a Hedge Fund in Australia. For those who don't already know, I managed the trading floor for a Billion Dollar Hedge Fund and I trained the entire trading team. 

Peter, you're in good hands, I'm going to slowly train you so that you become a star at the Hedge Fund you work for. There are many perks for being a star at a Hedge Fund you know.

First you get the money, then you get the power, then you get the women.

Peter has questions about breakout/breakdown trading vs buying on support and shorting on resistance. This is a common problem, that of being trigger shy when it comes to buying the new highs on a breakout.

This is where NFL QB Brett Favre comes to the rescue yet again. I don't follow Aussie rules football or cricket so NFL football analogies won't exactly ring a bell for those in Australia. 

Trust me on this, Brett Favre is the perfect guy to use when explaining how to get over being trigger shy. Football fans, all nod your head in agreement.

Let me quickly explain Brett Favre's game. 

He was a great competitor with a cannon for an arm, he moved really well for a QB, he was tough as nails, never missed a game even when injured, he took far too risks with the football but also made many spectacular plays.

Did you realize that Brett Favre is the career leader in most TD passes and interceptions. Brett Favre wasn't afraid to make a mistake. He realized that in order to win the game he needed to take calculated risks. When he thought his target was open, Brett Favre threw the ball to his target even if the defender was blanketing him.

How Brett Favre would fix any trader's issue with being gun/trigger shy.

Brett Favre would just tell you to make the throw when you see that your target is open. He would tell you that you need to keep throwing the ball to your open target in order to move the ball towards the end zone. He would tell you his next throw was going to be for a touchdown. He wasn't concerned with making mistakes and he was confident that he would eventually succeed.

I'm no Brett Favre, what I would tell you is to take the positive attributes from Brett Favre's game, his ability to forget about past mistakes and to make the next play with confidence, but to temper them with prudent risk management techniques.

The problem with being trigger/gun shy is that you are afraid of making mistakes and the more you lose money (making mistakes) the more you become gun shy. 

This is purely a confidence issue and this stems from the lack of a proper strategy.

Remember, we trade or invest in the markets with the main goal of making money. Making money requires that you take calculated risks. You can be wrong more than 50% and still make money in the markets. Did you know that you can be wrong up to 80-90% of the time and still make money.

We have to realize that trading is all about managing your risk and taking action when your strategy's requirements are triggered. You can't worry about making mistakes otherwise you will miss the opportunity to profit.

This doesn't mean that you should just be a 'gunslinger' and wildly take on every trade. Even Brett Favre wasn't that reckless. I take that back, he was totally reckless but he had the talent to get away with it most of the time. Brett Favre needed a window of opportunity before he took action and as traders we should remain on the sidelines until we also see that window of opportunity.

What you need is a game plan you really understand or a simple trading strategy you can follow so you can filter out the noise.

Let's get back to Peter's question on how to trade around support and resistance.

Most technical analysis books will tell you to draw a line above the market price where the price tends to stop and find resistance. Then they tell you to buy the stock when the price breaks through the resistance and that the stock will continue rising until it finds another level of resistance.

If it were so easy then my student Peter wouldn't have any difficulty with being gun shy about taking all trades that break through resistance.

The problem is that the text book case set up for support and resistance doesn't usually happen in the markets.

The problem you have to solve is if the stock is stronger or weaker.

Let's take a look at the Disney DIS chart just before the stock market crash.

                                                                                                 

I drew in my own support and resistance lines. Notice how I'm not looking to connect the highs or lows perfectly, all I'm doing is making a zone around where the price action and the moving averages have stopped going up.

Disney DIS moved $13 or 40% from $20 in January 2006 to $33 in January 2007. Then DIS moved about $4 or 8% from Jan 2007 to September 2008. This is an example of a true consolidation area, we need time to show us that we are in a consolidation area. Too often we mark consolidation areas on our charts just because the price seems to hover there.

You get the best moves from this type of consolidation are, the one that lasts a long time, because the stock is generating pent up energy and is waiting for a catalyst to send it moving in either direction.

If you waited and caught the move then you had a nice 40% move from $29 to $17 and it took only 3 months.

So Peter, take a look at how you construct the Support/Resistance lines. Remember that the best moves come when you are breaking out/down from a prolonged holding area.

Here's an important clue. Start following the S&P 500 and start to notice if your stock follows, lags or leads this index. 
Remember, you're not trading in a bubble and your stock will eventually follow the main direction of the S&P 500 unless it is truly powerful or extremely weak.

Here's one way to sum this up. You need to look for other clues within the price action instead of just looking at perfect technical set ups like support and resistance.

Where are we today with Disney?

Disney DIS moved $40 or 140% from September 2011 to May 2013. 
Now Disney DIS has been stuck in a consolidation area and has moved $6 or 9% from May 2013 to October 2013.

The moving averages are starting to come together and the S&P 500 is starting to stall out.

What does this tell you?

Stop and think. What would Brett Favre do? Better yet, What would Peyton Manning do?

Look at the example in 2009 and see if there are any similarities.

I will be breaking down the answer to the current price action in Disney DIS in our new service,Profit Behind The Blog.

For information regarding stocks we do like, check out our Flagship Newsletter.

This is a cursory look at Disney DIS and we are not making any specific buy or sell recommendation but merely voicing our opinion of the current situation. Each individual investor must conduct their own due diligence of both the company, the market sector as well as their own financial situation and risk parameters.

If you ever find yourself second guessing your every move, summon your inner Brett Favre and just make the damn play. Follow your strategy and learn from your mistakes. In the words of Tony Montana, The World is Yours! 

By Joel Laceda - October 4, 2013 BehindWallStreet.com