Why Investors Should Take Shares of Denny's Off the Menu

NEW YORK (TheStreet) -- The remarkable run of shares of late-night and road-side diner favorite Denny's (DENN) may be over.

The stock traded as high as $11.56 in December 1998, and then was shaved to as low as 30 cents a share in October 2000. The high until February 2004 was $1.30, when the stock's long-term turnaround story began.

After a high of $6.20 in July 2005, the shares crashed with the stock market to a low of $1.15 in March 2009, returning to the status of being an "option on survival." Investors who believed in a recovery of this eatery reaped huge returns, but daily and weekly charts show that the turnaround story is coming to an end. Investors should thus shift to a new menu.

Denny's is scheduled to report its quarterly results after the closing bell on Monday. Analysts expect the company to post earnings of 9 cents a share. The daily and weekly charts show significant downside risk, particularly if the stock loses its investment-grade $10 share price.

A stock trading under $5 a share cannot be bought on margin at many brokerage firms. Stocks trading for less than $3 a share should be considered an option on survival where you invest money you can afford to lose.

The key threshold today is $10 a share as many institutional equity money managers cannot own a stock trading below $10. Denny's has been above $10 only since Jan. 8, and may not yet be on equity funds watch list.

Let's look at the daily and weekly charts for Denny's and provide the key technical levels at which to buy on weakness and the key technical levels at which to sell on strength.

Investors not familiar with technical analysis should begin with the notion that a price chart for a stock shows a road map of past price performance, which provides guidance for predicting future share-price direction.

Here's how to read a daily chart. There are two moving averages to follow; the 50-day simple moving average is in blue, while the 200-day simple moving average is in green.

Here's how to read a weekly chart. This chart shows weekly price bars going back to the beginning of 2007 and thus includes the crash of 2008, then the current bull market for stocks that began in March 2009. The red line tracks the ups and downs of the key weekly moving average. The green line is the 200-week simple moving average. The red line that oscillates along the bottom of the chart is the momentum reading on a scale of 00.00 to 100.00. A reading below 20.00 is oversold and a reading above 80.00 is overbought.

A technically positive weekly chart occurs when a stock ends a week above its key weekly moving average with the momentum reading rising above 20.00.

A technically negative weekly chart occurs when a stock ends a week below its key weekly moving average with the momentum reading declining below 80.00.

Here's the daily chart for Denny's.


Courtesy of MetaStock Xenith

Denny's closed at $10.57 on Friday, up 2.5% year to date. The stock, however, is 13% below its all-time intraday high of $12.10, which was set on April 15.

The stock had been above its 50-day and 200-day simple moving averages since July 29, when the averages were $6.48 and $6.67, respectively. The stock failed to hold its 50-day simple moving average of $11.57 on April 29, and is above its 200-day simple moving average of $9.32.

Here's the weekly chart for Denny's.


Courtesy of MetaStock Xenith

The weekly chart shifted to technically negative at last Friday's close, with the stock below its key weekly moving average of $11.34 and with its momentum reading of 70.25, which is down from 79.68 a week ago. The 200-week simple moving average of $6.07 is the longer-term uptrend, and the "reversion to the mean" was last tested at $3.06 during the week of Oct. 29, 2010.

Investors looking to buy Denny's should place a good-till-canceled limit order to purchase the stock if it drops to $9.35, which is a key level on technical charts until the end of June.

Investors looking to book profits should place a good-till-canceled limit order to sell the stock if it rises to $11.75, which is a key level on technical charts until the end of this week.

A key level on technical charts of $10.23 should act as a magnet until the end of June.

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

More from Opinion

Elon Musk's Latest Twitter Tirade Is the Dumbest Thing on Wall Street

Elon Musk's Latest Twitter Tirade Is the Dumbest Thing on Wall Street

Elon Musk's Twitter Tirade Is the Dumbest Thing on Wall Street

Elon Musk's Twitter Tirade Is the Dumbest Thing on Wall Street

Why Google's Search Momentum Won't Be Badly Hurt by New EU Rules

Why Google's Search Momentum Won't Be Badly Hurt by New EU Rules

Flashback Friday: Amazon, Chip Stocks, Memorial Day

Flashback Friday: Amazon, Chip Stocks, Memorial Day

Time to Talk Tesla: What Happened This Week, Elon?

Time to Talk Tesla: What Happened This Week, Elon?