How to Trade Keurig Green Mountain and Dodge the Short-Squeeze

NEW YORK (TheStreet) -- Keurig Green Mountain (GMCR) traded to an all-time intraday high at $158.87 on Tuesday in reaction to a re-iterated buy rating by Canaccord Genuity who raised their price target to $168 from $134.

Another factor influencing the stock is a potential post-earnings short-squeeze as 5% of the tradable float in Keurig shares or 6.25 million shares have been sold short.

These influences raise the possibility that the stock will see increased volatility after the company reports quarterly earnings after the closing bell on Wednesday.

Analysts expect Keurig to earn 78 cents a share. The company has beaten earnings estimates in nine consecutive quarters and experienced price gaps higher following earnings reports released on Feb. 5, May 7 and Aug. 8. This sets the stage for a higher open on Thursday.

By definition, a momentum stock has a positive weekly chart defined by a weekly close above a key moving average with rising weekly technical momentum. Investing or trading any momentum stock should be done employing an exit strategy to lock in gains, and limit losses if a stock suffers a jolt of downside volatility.

Here's how to trade Keurig Green Mountain.

Investors in Keurig ($157.10) shares should enter a "good 'til canceled" limit order to sell strength to the Canaccord price target at $168.00, as this would lock in a gain of about 7.5%. Also employ a sell-stop below its key weekly moving average at $146.60 keeping in mind that this average will be rising each week.

If you are looking to buy Keurig on weakness enter a "good 'til canceled" limit order to buy weakness to a key technical level at $109.90.

Here's the daily chart for Keurig.

Courtesy of MetaStock Xenith

The daily chart for Keurig ($157.10) shows that the 2014 momentum run-up began from the test of the 200-day simple moving average (green line) at $68.73 0n Dec. 4, 2013. The upside to the Nov. 18 all-time intraday high at $158.82 totaled 131%. There was a 27% correction from the high of $124.42 set on Feb.20 to the low of $90.08 set on May 5. The stock is solidly above its 50-day and 200-day simple moving averages at $141.94 and $121.35, respectively.

The three price gaps higher on Feb. 6, May 13 and Aug. 22 followed better than expected quarterly earnings reported on Feb. 5, May 7 and Aug. 6, respectively.

Here's the weekly chart for Keurig.

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Courtesy of MetaStock Xenith

The weekly chart for Keurig shows that the 200-week simple moving average (green line) was the staging area from which the longer-term momentum run began when this average was $39.65 in January 2013.

Looking back to September 2011 the stock plunged 85% from $115.98 to as low as $17.11 in July 2012. This shows that when a momentum bubble pops the downside can be significant. This justifies the concept of trading momentum stocks with an exit strategy.

The weekly chart is positive but overbought its key weekly moving average at $146.60. The momentum reading shown in red at the bottom of the graph is overbought with a reading of 89.43 well above the overbought threshold of 80.00.

At the time of publication the author held no positions in any of the stocks mentioned.

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This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.


 TheStreet Ratings team rates KEURIG GREEN MOUNTAIN INC as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

"We rate KEURIG GREEN MOUNTAIN INC (GMCR) a BUY. This is driven by several positive factors, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, expanding profit margins, good cash flow from operations and impressive record of earnings per share growth. We feel these strengths outweigh the fact that the company is trading at a premium valuation based on our review of its current price compared to such things as earnings and book value."

You can view the full analysis from the report here: GMCR Ratings Report

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