PepsiCo's Earnings Rally Won't Last -- Use This Trading Strategy to Profit

PepsiCo (PEP) rallied on better-than-expected earnings, but don't expect the gains to last. Use this stock options strategy to profit from the coming move lower.
By Michael Thomsett ,

PepsiCo (PEP) - Get Report reported better-than-expected earnings on Thursday, causing shares to gain 1.5%, but technical analysis suggests the stock will reverse and move lower soon. Savvy investors can use stock options to take advantage of such a move.

The food and beverage company reported adjusted earnings per share of $1.35 for the latest quarter, vs. analysts' estimates of $1.30. PepsiCo also increased its full-year earnings estimates. This is all good, but the chart shows the stock is poised to head lower.

Resistance has been rising since early April, but Thursday's price action opened above resistance and then fell back below it. Another warning was seen in the relative strength index, which showed momentum approaching overbought levels during Thursday's session. The strongest bearish signal of all showed up in the four sessions before Thursday, however. Then, a double bullish piercing lines signal (a.k.a. "dark cloud cover") appeared. It's very rare to see two in a row like this. All of this portends a bearish move in the next few days. This is not a bearish long-term forecast on the stock, though. 

PepsiCo is a holding in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. See how Cramer rates the stock here. Want to be alerted before Cramer buys or sells PEP? Learn more now.

Expecting a fairly quick retracement, we looked at the July 15 options, which expire in eight days. The 107 put option closed on Thursday at an ask price of 0.71. Including trading costs, a single contract will cost $80. Breakeven will be $106.20 (Strike of $107 less 0.80 for the put). If the price falls lower between now and next Friday, this position becomes profitable. For only $80, taking a long put position offers great potential for a one-week trade.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

Besides blogging atTheStreet.com,Michael Thomsett alsoblogs at theSeeking Alphaand several other sites.He has been trading options for 35 years. His website lists his options books: Thomsett Publishing Website- he has also published a paper in the current issue of the Journal of Technical Analysis - link at JOTA issue 69 -- this paper challenges commonly held beliefs about market efficiency and poses a trading system that can beat the market. His new book can be viewed at tinyurl.com/z44kzlu

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