Stock Market

Chart Of The Day: Will Kellogg’s 3-Way Split Save the Stock?

Kellogg (NYSE:K) made a surprising announcement. It plans to break the business into three distinct independent companies—plant-based, cereal, and snacks—to allow each part of the business to focus on growth.

This dramatic move will extend its long-term strategy of focusing on snacks. As people increasingly eat between meals, the company bought Pringles a decade ago for $2.7 billion. Conversely, Kellogg’s regular business, cereal, has stagnated as the culture turns to consumers eating on the go. It did receive a temporary boost during the coronavirus pandemic when consumers were forced to stay at home. 

Will this break-up strategy help boost the stock? Well, that depends. Let’s look at the chart.

Kellogg Daily

The announcement increased the stock’s price by 2%. While that sounds like positive price action, it’s not so simple. The session’s bullishness was deflated, as the stock initially surged 5%, but bears executed a counter-attack, demonstrating resistance at the May 26 high.

If the price falls below $66, it will have completed an H&S top.

Now, let’s get a broader scope, and see if we can understand the context of the moves on the chart.

Kellogg Weekly

We now realize the significance of the daily H&S, as the price found resistance at the top of a weekly triangle, whose stop begins in 2018.

Here, we see both the Moving Average Convergence Divergence—comparing price averages of different periods—and the Rate of Change—comparing momentum—have triggered sell signals. The ROC fell below 0.

If the Daily H&S is complete, the price will retest the bottom of the weekly triangle.

Trading Strategies

should wait for the price to fall through the neckline and employ a 3% and a three-day (preferably with a weekend) filter to avoid a bear trap. Then, they should wait for a Return Move to retest the pattern’s integrity before committing to a short position.

would wait for a 2%, two-day penetration and a corrective rally for a better entry, if not for confirmation.

could be short now on the resistance by the pattern’s shoulders and weekly triangle top. Money management is key. Here is a generic example:

Trade Sample – Aggressive Long Position

  • Entry: $71
  • Stop-Loss: $72
  • Risk: $1
  • Target:$61
  • Reward: $10
  • Risk-Reward Ratio: 1:10

Author’s Note:

 

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