Yum Brands (YUM) — operator of quick-serve restaurants Taco Bell, Pizza Hut and KFC — reported its third-quarter earnings after the close of trading yesterday. Yum’s earnings came in at 85 cents per share vs. estimates for 93 cents, and revenues came in at $3.47 billion vs. a consensus call for $3.53 billion. Also, YUM’s adjusted net income slipped to $152 million (33 cents per share) from $471 million a year earlier.
Yum Brands’ struggles in the Chinese market persist — it lowered its forecast for 2013 earnings while the company continues to recover from a poultry incident late in 2012. YUM quickly fell roughly 8% in after-hours trading as investors made a clear vote of no confidence.
As we look at the charts now, please bear in mind that YUM obviously hasn’t yet traded in a regular trading session since its earnings call last night, but I did draw in the levels where the stock traded after hours.
The multiyear chart of YUM reveals two clear reference lines — namely its 2009 uptrend as well as a resistance line dating back to April 2012. Yum stock traded well off the 2009 lows, but in late 2011 it set foot on a steep and (at the time) seemingly relentless run higher, which topped out in April 2012.
The main part of said rally lasted for around five months and 40%, during which YUM literally showed no volatility but a constant bid higher. Zero-volatility runs of this magnitude often end in meaningful consolidation or retracement moves, which is exactly what happened with YUM ever since the end of that rally.
If YUM opens for trading where it closed Tuesday’s after-hours session — near $66 — then the stock would be gapping down and breaking its 2009 uptrend all in one go. Clearly that would be anything but bullish, particularly if the stock fails to stage any meaningful intraday rally.
YUM’s year-to-date chart shows another uptrend and a resistance line, which the stock has been trading between since early August. If the stock were to drop below this February uptrend line, it would be making a clear break out of this pattern, which barring any quick bullish reversal would put the ball in the bears’ court.
With stocks around earnings, my best trades always happen once I have given the stock some time to settle and investors make up their minds for the near- to medium-term. Buying or shorting a stock ahead of an earnings announcement (in my opinion) is a losing game, although there are options strategies that can be played with decent odds, if the options are priced the right way.
As this applies to YUM, by today’s afternoon session, we should have a good idea whether the stock will remain heavy for some time or simply bounce back quickly.
Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for his free Weekly Market Outlook Video here. As of this writing, he did not hold a position in any of the aforementioned securities.