A large bearish engulfing candle formed on the daily chart of beverage and snack company, PepsiCo (PEP) - Get Report in Monday's session, and the stock looks like it is headed lower after reporting earnings before the market opened Tuesday.
The engulfing candle encompassed the entire range of the previous week's trading and took out several layers of key technical support. It suggests a shift in the direction of the primary trend and in this case, the continuation of the breakdown from a small horizontal channel pattern that formed over the previous two months. PepsiCo is headed lower and here is how to trade it.
The 50-day moving average and a multiple-month trend line were broken on Monday and the stock price closed below this confluence of support. The relative strength index moved out of an overbought condition and below its 21 period signal average as the channel consolidation was underway, and it has continued to track lower and is currently below its center line.
Daily moving average convergence divergence is overlaid on a weekly histogram of the oscillator, and is moving below its center line on both time frames. These indications reflect deterioration in positive price momentum and short-term trend direction.
Chaikin money flow moved into negative territory last week, suggesting the stock is undergoing distribution. A further indication that the stock is due for a pullback is the percent difference between the 50- and the 200-day moving averages. The short-term average has diverted by more than 5% from the longer-term average, the highest reading since early 2015.
PepisCo is a short-sale candidate at its current level using a disciplined trailing buy-to-cover stop. The first area of support would be the $110.50 level, which is the 38% Fibonacci retracement level of the December 2016 low and this year's June high. The second and more likely downside target is the $108.00 area, the 50% retracement level and the current location of the 200-day moving average.
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This article is commentary by an independent contributor. At the time of publication, the author had no positions in the stocks mentioned.