Ruby Tuesdays Rising On Positive Earnings Estimates

05/19/09 08:30:23 AM

by Donald W. Pendergast, Jr.

Ruby Tuesday's common stock has been on a near-vertical rampage for the last two months, but why? Is the stock ready for a rest, or is there more upside in store?

Security: RT
Position: Accumulate

Ruby Tuesday's (RT) shares have risen more than 700% since the major market low of March 6, 2009, and they're also getting very close to their 52-week high of $8.84. This move just can't continue — or can it? Let's take a look at some of the fundamental and technical factors that are driving RT higher before attempting to plan for a possible way to play this super-momentum restaurant stock.

FIGURE 1: RUBY TUESDAY, WEEKLY. Weekly based traders should continue to monitor this chart to see if the complete cup with handle pattern actually forms; it could be a very powerful trade setup, should it come to pass.

Graphic provided by: MetaStock.

Fundamentally, RT's company profile appears to have turned the corner, meaning that the worst of the recession-induced decline in the stock is likely over for now. RT features a price-to-sales ratio of only 0.35, which is outstanding, and earnings are also projected to rise from the current quarter's EPS estimate of 0.21 all the way to 0.55 during the next 12 months. Obviously, major institutional players like this kind of earnings projection trend and have apparently been building a substantial position in RT over the past few months. Mutual funds are keenly interested in a company's quarterly earnings trend, and unless there are other compelling reasons to accumulate a stock, chances are they won't be taking an interest in a particular stock that can't make the earnings cut.

Technically, the move since early March has been breathtaking — plenty of wide-range weekly bars, heavy volume, and a very heavy accumulation trend are the main items of note here. It's interesting to see how much higher the accumulation-distribution level is now than it was at either of the two preceding weekly swing highs; it's proof positive that a ton of money has been and is continuing to flow into this stock. The stock has yet to make a meaningful pullback, so here's something to watch for — it's possible that the visible cup pattern (traced out by the blue hand-drawn line (on Figure 1) could, on a proportional 23% or 38% retracement move, morph into one of the most powerful chart patterns in existence — William O'Neill's famed cup with handle pattern.

If price pulls back at the upper resistance line and then begins to form the first part of the handle on gradually declining volume, that event could be a tipoff that the stock will eventually attempt another break higher. Chart patterns can be subjective; no two are exactly alike, and what one trader might deem a perfect cup with handle pattern may not fit with your own interpretation of that particular pattern at all. Yet, given the current technical image presented here, it would be prudent to monitor RT's weekly chart for the next month or two to see how all of this plays out. There could also be a variety of intraday, daily, and weekly trade setups that develop with a potential pullback in RT.

What about right here, right now? Is there a way to play RT's tremendous momentum? Well, an option play doesn't make sense, given the mile-wide bid/ask spreads on most of RT's calls and puts, but what about grabbing a 30-minute chart and using the stochRSI indicator (which is also a major improvement over the original relative strength index (RSI) developed way back in the 1970s by J. Welles Wilder, one of technical trading's original godfathers, to time a series of long and short entries during a daily/weekly pullback in RT? You could make a series of trades on the intraday time frame while waiting for the possibility of a weekly cup and handle to form.

If the cup with handle actually develops, the stock then becomes a serious long trade setup, one worthy of a modest amount of trading capital. I'd also suggest you read O'Neill's book entitled How To Make Money In Stocks for more precise guidance on how to trade the cup with handle pattern; it's worth the price of the entire book.

Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title:	Writer, market consultant
Company:	Linear Trading Systems LLC
	Jacksonville, FL 32217
Phone # for sales:	904-239-9564
E-mail address:	lineartradingsys@gmail.com
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Ruby Tuesdays Rising On Positive Earnings Estimates

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