Herbalife – Don’t Be a Hero, Don’t Buy HLF Stock

HLF stock dropped like a rock on news that Pershing Square was readying a new presentation. Don't buy the dip.

   
Herbalife – Don’t Be a Hero, Don’t Buy HLF Stock

Shares of Herbalife (HLF), the nutrition company of choice for activist investors, dropped more than 11% Monday on concerns that Bill Ackman of the Pershing Square hedge fund will make a case today against HLF stock that will put the proverbial nail in the coffin.

beatthebell 185x185 Herbalife   Dont Be a Hero, Dont Buy HLF StockAs appealing as the prospect might seem, this is no time for traders to fight the forces that be by buying the stock for a bounce.

But active investors and traders might consider playing the short side.

Monday’s news came during a CNBC appearance by Bill Ackman in which he said he planned on delivering a “death blow” against Herbalife during a Tuesday presentation.

Those that have followed the situation around Herbalife during the past 18 months or so will recall that Bill Ackman has long made his bearish case against Herbalife, but the stock again began to rise dramatically as activist investor giant Carl Icahn made a bullish case for the company. Ackman and Icahn went head-to-head in a public battle that peaked during a CNBC interview of the two last year.

At last week’s Delivering Alpha conference, the two investors made a joint appearance, even symbolizing their forgiveness by hugging on stage. Icahn sits on good profits on his HLF stock position, and speculation has it that Ackman is trying to convince Icahn to exit his long position, which for all I know he has already done.

Furthermore, Herbalife’s stock buyback program has recently run its course, which thus is one additional layer of support for the stock that is removed.

As I routinely discuss in this column, some of the highest-probability trades set up when news flow synchronizes with the technical picture on the charts. As it’s now clear that news flow for HLF stock has once again turned negative, the following charts support further weakness in the stock.

HLF Stock Charts

On the weekly multiyear chart, note that when HLF stock peaked in January, it did so on waning momentum. We see this as the MACD oscillator peaked in October 2013 and made a lower high in January, when Herbalife’s price peaked, thus flashing so-called bearish negative divergence.

The stock has since fallen, and with Monday’s selloff, it marginally broke below the late 2012 support line.

hlfmultiyear 300x176 Herbalife   Dont Be a Hero, Dont Buy HLF Stock
Click to Enlarge

On the daily chart, note that after falling off its January highs, HLF stock found support in March and proceeded to retrace exactly 50% of this selloff. In late May, the stock had reached this 50% retracement line, which also coincided with the stock’s 200-day simple moving average (red line), thus offering the stock a confluence resistance area.

Last week, Herbalife’s stock price again began to drop and now looks set to retest the March lows as a next target. Beyond there, HLF can easily drop toward the $40 area in coming weeks or months … if Ackman’s accusations of Herbalife hold up, anyway.

hlfdaily 300x181 Herbalife   Dont Be a Hero, Dont Buy HLF Stock
Click to Enlarge

The ride for HLF stock could be rocky as it descends, and active investors considering the short side of the stock would be wise to trade in small size and possibly implement an options strategy for risk management purposes.

Like what you see? Sign up for our daily Beat the Bell e-letter and get investment advice delivered to your inbox every morning!

Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2014/07/herbalife-hlf-stock-bill-ackman/.

©2014 InvestorPlace Media, LLC

Comments are currently unavailable. Please check back soon.