For PBG, Is Gap Support Test A Go Or No-Go?

08/20/09 12:44:51 PM

by Donald W. Pendergast, Jr.

When a stock with solid fundamentals suddenly gaps higher, there is usually a good reason for the upward surge. Let's examine Pepsi Bottling Group's price action in the aftermath of one such gap.

Security: PBG
Position: Buy

Pepsi Bottling Group (PBG) gapped higher by nearly 10% on August 4, 2009, and the price action that has followed has been very favorable for those who may have a bullish outlook on this beverage industry titan. A closer look at PBG's daily chart (Figure 1) will help paint a clearer picture of some of the technical and fundamental dynamics that have been at work in this particular stock.

FIGURE 1: PBG, DAILY. Solid fundamentals and strong technicals appear to be combining to offer this low-risk, long swing trade opportunity.

Graphic provided by: MetaStock.

One of the first things to look for after a large gap has printed is to check the fundamental status of the stock or commodity in question. In the case of equities, perhaps there was a surprise earnings announcement or a major management shakeup or a prominent stock analyst released a favorable/unfavorable earnings growth projection. When dealing with commodities, check for government agency news releases, supply/demand projection data, weather-related data, and for geopolitical events that can have an immediate effect on certain classes of commodity markets. This is probably a bit easier with stocks, especially with large-cap equities that have many analysts tracking every bit of vital fundamental data concerning a given company. Some commodities have no shortage of analysts -- think markets like crude oil, natural gas, gold, silver, copper, corn, wheat, and soybeans -- while other, more thinly traded markets may not be as easy to glean key fundamental data from; rice, cocoa, and lumber might be in this category.

But right now, we're dealing with PBG, and there's no shortage of fundamental data for this stock; earnings estimates are projected to rise through the end of fourth-quarter 2010, even as its earning price share (EPS) is also projected to rise over the same time period. Of course, the main catalyst for the sudden 10% gap higher was the announcement on August 4 that PepsiCo (PEP) had finally reached an agreement to buy PepsiAmericas (PAS) and Pepsi Bottling Group (PBG) in a nearly $8 billion deal.

Now that the fundamentals are more firmly grasped, what about the technicals here? This is a takeover situation, so will there even be any chance to trade this stock? Perhaps; there may be one last chance to trade PBG on the long side. First off, the long-term money flow (based on the 100-day Chaikin money flow indicator (CMF)(100)) is still well above its zero line, a very good sign. Note how orderly the selloff has been after the gap, just a nice easy retracement to test the gap support. Now that prices have begun to turn higher, the support test may be tentatively viewed as successful. Note also how the former resistance area near $34.85 has now become a new major area of support for PBG, yet another notch in the bullish camp's belt. Finally, PBG boasts a very respectable weighted rate of return over the past three-, six-, and 12-month time frames, easily outpacing the Standard & Poor's 500 over the same period.

If you choose to engage this interesting long trade setup, the logistics are plain and simple -- buy-stop Wednesday's high near $35.75, and if filled, immediately place a stop-loss just below the gap support near $35.25. The logical initial target for this trade is the prior high at $36.57. Trailing the entry with a two- or three-bar trailing stop of the lows could be a sound way to progressively lower your risk and even lock in profits, should they arrive. If $36.57 is approached, you might even consider taking half the position off at a profit, letting the rest ride with the trailing stop. Of course, if the broad market also rises in sympathy, it will make the trade that much easier to stay with. As always, the market is always right, whether it's win, lose, or draw.

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
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Phone # for sales:	904-239-9564
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For PBG, Is Gap Support Test A Go Or No-Go?

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