Natural foods grocer Whole Foods Market (WFM) had a smattering of good and bad news in its third-quarter earnings Wednesday, though based on the reaction of Whole Foods stock, you’d have thought the report was lopsided to the downside.
Whole Foods earnings came in at 32 cents per share vs. the estimated 31 cents, and 7% higher from the same quarter last year. WFM revenue was reported at $2.98 billion, which was short of the estimated $3.04 billion by analysts, but still improved at 2% year-over-year.
Now to the nasty part: Whole Foods also lowered its fiscal year 2014 earnings guidance from an initial range of $1.69-1.72 per share to a new range of $1.65-1.69. All the while, analysts had their estimates at $1.73. Although WFM did try to inspire some confidence with its announcement of an additional $500 million to its stock buyback plan, investors didn’t want to hear any of it and sold the stock to the tune of 11%.
A little more than two weeks ago, I warned about how the overbought state and steep slope of Whole Foods stock made it a less-than-favorable candidate on the long side, particularly heading into the company’s earnings announcement. On the multiyear chart, Whole Foods stock at the time had reached, and marginally exceeded the upper end of its multiyear uptrending channel — something it hadn’t done since October 2012. While at the upper end of this trading range, WFM also was trading roughly 27% above its 200-day simple moving average, and thus historically extended by this measure as well.
Thursday’s post-earnings selloff in WFM has now brought the stock right back down into the middle of the longer-term trading range, which through this lens is thus far just constructive consolidation in price, or necessary mean-reversion.
On the daily charts, Thursday’s selloff came on a huge spike in volume — something that is to be fully expected given WFM’s steep incline into earnings and the gap-down in price action Thursday morning. Whole Foods stock did, however, settle the day right at a confluence area of support made up of its 100-day SMA (blue line) and horizontal support, i.e. previous resistance until mid-September, around the $57 area.
Given the big-volume selloff, odds don’t yet favor a trade in either direction.
Traders should let Whole Foods stock settle some and let emotions relax. Should WFM shares continue to fall in coming weeks, a next area of support is close to the $51-$52 area, which is made up of the 200-day SMA and next lateral support.
Learn more about the strategies Serge Berger uses to create profits in the market every day. Download his trading plan in the “Essence of Swing Trading” eBook by clicking here. At the time of publication, Berger had no positions in the securities mentioned.