Wendy's (WEN) - Get Report reported better-than-expected third-quarter earnings Wednesday, and the stock opened with a high of $21.75, failing below its risky level for November at $22. My recommended strategy is to counter trade this stock between its fourth-quarter pivot at $20.32 and the monthly risky level at $22. Monday's low of $20.36 supports this recommendation.
Wendy's reported a strong rise in same-store sales and benefited from new restaurant openings. Here's the coverage of this earnings report as posted on TheStreet.
The stock closed Tuesday at $20.84, up 33.5% year to date and in bull market territory 39.3% above its Dec. 26 low of $14.96. The stock set its 2019 high of $22.84 on Sept. 6 and is 8.8% below this high.
Longer-term Wendy's has had an extremely volatile ride. The stock traded as high as $21.97 in December 2006 then traded as low as $2.63 in October 2008. This crash provided a buying opportunity between $1 and $3 a share which I consider an "option on survival." This concept is to buy the stock with funds you can afford to lose and then forget about the investment. Just let it ride.
Today, the stock is no longer cheap. Its P/E multiple is elevated at 31.89 with a dividend of just 1.93%, according to Macrotrends. The fundamentals thus suggest profit-taking.
The Daily Chart for Wendy's
Courtesy of Refinitiv XENITH
The daily chart for Wendy's shows the bull market rise that peaked at $22.84 on Sept. 6. The price gap lower shown on Sept. 10 occurred as the fast-food restaurant announced additions to its breakfast menu.
The close of $15.61 was an important input to my proprietary analytics and the annual pivot is $17.54. This level was a magnet between Jan. 25 and March 28, then held as a value level at the Aug. 5 low which was two days before a positive reaction to earnings released on Aug. 7.
The close of $19.58 on June 28 was another important input to my analytics and the second half pivot remains at $19.34. This level was a magnet between July 1 and Aug. 7 and became a value level on Sept. 10 as the new breakfast menu was released.
The close of $19.98 on Sept. 30 was an input to my analytics and resulted in the fourth quarter pivot at $20.32 which is the low end of today's trading range. The close of $21.18 on Oct. 31 was also an input that resulted in the monthly risky level for November which is the high end to today's trading range at $22.00.
The Weekly Chart for Wendy's
Courtesy of Refinitiv XENITH
The weekly chart for Wendy's shows the extreme volatility from the December 2006 high of $21.97 and its "option on survival" low of $2.63 set in October 2008. The weekly chart is neutral with the stock above its five-week modified moving average at $20.91 and well above its 200-week simple moving average or "reversion to the mean" at $15.30. Note the longer-term buy signal that occurred during the week of Jan. 25, 2013 when the stock moved above this key moving average. The 12x3x3 weekly slow stochastic reading is projected to slip to 62.02 this week down from 64.20 on Nov. 1.
Trading Strategy: Buy weakness to the quarterly pivot at $20.32 and reduce holdings on strength to the monthly risky level at $22.00.
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 Sep. 30 established the level for the fourth quarter.
The close on Oct. 31 established the monthly level for November.
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.
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.