Saturday, February 10, 2018

Cup and Handle May Signal FLO Recovery

Following three consecutive quarters of earnings beats and some positive forward guidance, Flowers Foods, Inc (NYSE: FLO) may have finally turned it around.  A string of quarterly revenue misses dating back to November, 2015 put extreme pressure on the share price which bottomed at $13.56 in August of 2016.  Since then, the company embarked on a restructuring plan that is still a major work in progress.  The results are beginning to materialize, however, with their earnings beat announced on Wednesday, 7 February.

What caught our attention in the wake of last week's stock market turmoil was the relative strength FLO demonstrated while much of the broader market was getting crushed.  Tuesday through Friday were all up days with significant strength.  In fact, there was a missed short term opportunity with FLO since it drew a double bottom with a very strong bullish candle on Tuesday, then confirmed the double bottom with a breakout on Thursday.  The stock is now already trading too close to the double bottom price target for it to be a profitable play there, however.

For those interested in an intermediate term play, it's worth looking at the Cup and Handle drawn by the stock on the daily chart from February through the breakout of the Handle at the end of the last trading session. 

FLO Daily Chart
The target price from the breakout is $23.52, representing the 78.6% extension of the right rim of the cup from the bottom of the cup.  Now, there's a fair amount of resistance right at the breakout level, so do expect the stock to retrace back to that resistance level at least once.  The bounce off that retest would be the safest entry, and given the underlying volatility in the market, that's precisely when I intend to enter. 

Looking at some of the other technicals lining up on the chart, we can see that this breakout also involves a channel that formed from the low of the cup last August. That channel did breakout once before, and you can see that it offered a bit of support towards the end of 2017 before collapsing.  Be cognizant of it, however, it's also more likely that the support will hold the second time around.  (If it doesn't, get out of the trade fast.)

There are two cautionary tones in the RSI(9) and in the MACD(5,34,5.)  Both are showing a bearish divergence which should give us pause.  The MACD just drew a bullish crossover, but I'm concerned about that divergence.  It's another reason to wait for a pullback to support before entering.

Relative Strength - the bottom-most indicator I'm showing - is sitting right on a resistance line.  I'd really like to see RS break through that line and hold before entering as well.  When you look at the JDK-RS line and the JDK-RS Momentum line, all indications are that it should do just that.  RS is improving, and more importantly, the momentum of the RS line is improving. 

We're going to play this as an intermediate length trade.  I expect it to take several weeks to reach the target after a true breakout - meaning, after a breakout and then a pullback to or just below the breakout level.  By waiting for that pullback, though, we'll be able to set a much more aggressive stop just below the handle top, and set ourselves a much better risk/reward ratio.  It should also give the overall market time to settle down a bit and show us its true next move.

Add this one to your watch list and wait for the pullback.  There's no point in rushing the trade given the volatility in the broader market.

Happy Trading.

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