Procter & Gamble (PG) - Get Report beat fiscal first-quarter earnings estimates Tuesday and raised its guidance for its fiscal 2020. This positive report should have caused the stock to set a new all-time high, but it did not.
Tuesday's post-earnings high has been $124.22 vs. its all-time intraday high of $125.36 set on Sep. 30. My reason for concern is that the stock's weekly slow stochastic reading is falling out of overbought territory and a close on Friday below its five-week modified moving average at $120.89 would downgrade the weekly chart to negative. I show downside risk to its 200-day simple moving average at $108.90.
The stock is also overvalued fundamentally with its P/E multiple of 25.93 and a dividend yield of 2.54%, respectively.
P&G is a component of the Dow Jones Industrial Average and has been a solid performer so far in 2019. The stock closed Monday at $119.08, up 29.5% year to date and in bull market territory 37.3% above its Dec. 26 low of $86.74.
The stock extended its winning streak in terms of beating earnings-per-share estimates to 20 consecutive quarters. It seems to me that that the consumer brands company was able to raise prices at the supermarket to offset the impact of a stronger dollar. I have noticed higher prices when I shop at my local Publix supermarket. I wait for the weeks of sale prices for Tide detergent, Charmin toilet paper and rolls of Bounty towels. In my opinion, P&G has taken advantage of consumers on Main Street, USA who need to buy such consumer staples.
The Daily Chart for Procter & Gamble
Courtesy of Refinitiv XENITH
Procter & Gamble has been trading above a "golden cross" since Sept. 12, 2018, when the 50-day simple moving average rose above the 200-day simple moving average to indicate that higher prices would follow. Given this signal investors were able to buy the stock on weakness to the 200-day SMA at $80.35 on Oct. 11, 2018. This was just before a positive reaction to earnings that was released on Oct. 19. The 2018 year-end close of $91.92 was an important input to my proprietary analytics and its annual pivot is now a value level at $101.52. The June 28 close of $109.65 was another important input to my proprietary analytics. The semiannual value level remains at $103.20. The close of $124.38 on Sept. 30, the day of the high, was the latest input to may analytics. The fourth-quarter value level is $106.09. The monthly risky level for October is above the chart at $127.68, but it expires at the end of the month.
The Weekly Chart for Procter & Gamble
Courtesy of Refinitiv XENITH
The weekly chart for P&G is neutral with the stock above its five-week modified moving average at $120.97. The stock is well above its 200-week simple moving average or "reversion to the mean" at $90.32, last crossed during the week of Oct. 26, 2018. The 12x3x3 weekly slow stochastic reading is projected to slip to 75.63 this week down from 81.37 on Oct. 18 falling below the overbought threshold of 80.00. Back on Oct. 4 this reading was above 90.00 making the stock an "inflating parabolic bubble" which is warning that a 10% to 20% decline could occur over the next three to five weeks.
Trading Strategy: Buy weakness to the 200-day simple moving average at $108.90 and add to positions on weakness to quarterly, semiannual and annual value levels at $106.09, $103.20 and $101.52, respectively. Reduce holdings on strength to up to its all-time intraday high of $125.63.
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How to use my value levels and risky levels:
Value levels and risky levels are based upon the last nine monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31, 2018. The original annual level remains in play.
The close at the end of June 2019 established new monthly, quarterly and semiannual levels. The semiannual level for the second half of 2019 remains in play.
The quarterly level changes after the end of each quarter so the close on Sept. 30 established the level for the fourth quarter. The close on Sept. 30 also established the monthly level for October as monthly levels change at the end of each month.
My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in.
To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.
How to use 12x3x3 Weekly Slow Stochastic Readings:
My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.
The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best.
The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold. Recently I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble" as a bubble always pops. I also call a reading below 10.00 as being "too cheap to ignore."
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.