Shares of specialty coffee company Keurig Green Mountain Inc (GMCR) saw a big rise in 2014, but the performance since the mid-November earnings report has been concerning for the bulls, and rightly so. Currently, active investors and traders have well-defined risk and reward for playing GMCR stock to the short side.
After a steep rally in October and November, Keurig Green Mountain reported fiscal fourth-quarter results on Nov. 19, and despite a beat on the top line, GMCR stock reacted negatively the following day.
The issue? It could be that after The Coca-Cola Co (KO) took a $1.30 billion stake in GMCR stock, many investors assumed that the company could soon buy the rest of Green Mountain. However, no such announcement came. And besides, Green Mountain still has its own sizable share buyback program that it continues to execute, so it is somewhat unlikely that Coca-Cola would the rest of the shares after the big run-up in price in 2014.
Through this lens, because the GMCR stock rallied strongly into the November earnings announcement and sold off hard immediately after, it was a classic “buy the rumor and sell the news” reaction.
GMCR Stock Charts
Looking at the multiyear weekly chart of GMCR stock, we note that the sharp rally in 2014 broke shares to new all-time highs in the early part of the year. However, the entire rally came on waning upside momentum as represented by the Relative Strength Index (RSI) at the bottom of the chart. This ultimately weighed on the stock too much and led to a quick and steep mean-reversion move in November and December.
Furthermore, the Bollinger Bands (blue moving averages) are now narrowing again, which through a multiweek/month lens could speak for a better directional move from here.
On the daily chart, we see that after the stock broke past its summer highs (black horizontal) in August, it rallied another steep 20% in October and November until the earnings report. The selloff since then has erased the majority of the autumn rally in an accelerated fashion.
Most concerning, however, is the gap-down price action from after the earnings report, which has many of the qualities of a better intermediate-term top.
In the last week of 2014 trading, GMCR stock broke below a multiweek consolidation phase and now looks poised to work its way back toward the 200-day simple moving average (red line).
Active traders and investors could now consider selling short the stock on a break below $131 for an initial move toward $125. However, short sellers should be aware that GMCR stock is scheduled to soon pay a dividend of 28.75 cents and that the stock goes ex-dividend on Jan. 9. In other words, short sellers that hold the stock short through these dates will be responsible to pay this small dividend.
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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.
