We’ve opened a new bearish trade on Keurig Green Mountain (GMCR).
Last week, GMCR shocked Wall Street by not only missing revenue estimates by $20 million and earnings estimates by $0.02 per share — coming in at $1.13 billion and $1.03 per share, respectively — but also cutting guidance for 2015. Apparently, the company’s strategy to eliminate compatibility with its “My K-Cups” product — which allows people to brew their own coffee — from the Keurig 2.0 hurt sales. It also dimmed the company’s growth outlook.
You see, GMCR was trying to reach that sales nirvana where you not only are able to sell a front-end product (the Keurig brewing machine) but also are able to sell a product consumers need to buy every week (the K cups) by forcing consumers to buy GMCR coffee instead of putting their own in a reusable My K-Cup. Unfortunately for them, it backfired. Now the company is scrambling to retrofit the Keurig 2.0 to accept My K-Cups. Even worse, GMCR has proven it will not be able to grow its branded coffee sales as quickly as many analysts had expected.
This news caused the stock to complete a head-and-shoulders top — a bearish reversal pattern, which we identified using Profit Scanner powered by Recognia.
The head-and-shoulders top pattern was completed on May 7, when GMCR closed below the support level of the pattern.
Based on the pattern, we expect the stock to drop to a target price range of $54-$64 (as illustrated by the dark red bar in the image below).
After gapping down and breaking through the neckline of the head-and-shoulders pattern, the stock tried to rebound, but it appears it is now forming a “dead-cat bounce” — a small, unsustainable rebound that occurs after a dramatic price drop. We anticipate the stock will quickly return to recent support at $95 and will then watch for it to drop lower toward the longer-term price target established by the completion of the head-and-shoulders pattern. To trade this downside action in GMCR, we recommend the following:
Buy to open the GMCR July 95 Puts (GMCR150717P00095000) for a maximum price of $3.10.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next SlingShot Trader trade and get 1 free month today by clicking here.
You can learn more about identifying price patterns – like a bearish head and shoulders top – and using them to project how far you think a stock is going to move in their Advanced Technical Analysis Program.
