Darden Restaurants (DRI) reported second-quarter earnings before the start of trading yesterday, and DRI stock fell amid an iffy report and news that it planned on spinning off one of its underperforming businesses.
DRI, which owns and operates a variety of Italian and seafood full-service restaurants through North America came in with earnings per share of 20 cents, which was in line with Street estimates. On the top line, revenue of $2.05 billion came in short of the $2.07 billion consensus estimate as same-store sales fell 1% at its Olive Garden, Red Lobster and Longhorn Steakhouse chains.
Darden furthermore reported that it plans to sell or spin off its Red Lobster business, which has continued to struggle over the years and been one of the weakest performing brands in the company’s restaurant portfolio. The credit rating agency Standard & Poor’s also jumped in and placed the company on credit watch.
Given the combination of in-line earnings, a spinoff and being placed on credit watch, the stock gyrated wildly intraday Thursday, closing lower by 3.59% on the day, although well off its intraday lows more than 3% lower.
From a longer-term multiyear perspective, the chart of DRI stock remains in a constructive position and pattern — one that offers traders and investors alike two very defined lines of resistance/support.
After a steep run off its late 2008 capitulation lows into early 2010, DRI stock began to slow its ascent; over the ensuing years, while still trending higher, developed a key line of support. The support line, currently close to the $46 mark, has been tested six times since 2010, making it a obvious and strong support area to watch closely.
Most recently, in late September, DRI stock once again tested the support line, but quickly bounced higher — two months later, by the latter part of November, Darden shares had reached their upper resistance line, made up of diagonal resistance that connects the year-to-date peaks. From here, if Thursday’s bullish intraday turnaround is any clue, odds favor an eventual break past resistance over a break below support.
On the daily chart, Thursday’s move was likely the most significant price action for DRI stock since the early October rally off the support line.
I often discuss the confluence area support levels that I keep a close eye on, and on Thursday, DRI held an important confluence support area with its bounce off the intraday lows. DRI stock has good support around the $50-$50.50 area, which is made up of its 100-day (blue) and 200-day simple moving averages (red), as well as its 50% retracement of the rally off the late September lows. Traders and investors now have a good reference level (Thursday’s lows) to lean against.
For my part, I would like to see a follow-through buying day before again getting in on DRI stock from the long side.
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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 e-book by clicking here. As of this writing, he did not hold a position in any of the aforementioned securities.