YUM Watch

Yum! Brands Inc. (YUM), whose holdings include such American suburban-sprawl names as Kentucky Fried Chicken, Pizza Hut, Taco Bell, Long John Silver's and A&W root beer, as well as a chunk of the fast-food market in China, as moved to to bull phase, attempting to succeed where a similar mid-February breakthrough failed.

The company is coming up to earnings after the close on April 20, so it's in a volatile place, just by the nature of the calendar.

sym	chan	adx	traj	psar
YUM

YUM has been trading sideways with a slight downward bias since early November, and that is reflected in the weak brown-zone trend as measured by the average directional index (adx).

The financials give reason for caution, but also for irrational exuberance. The company is heavily laden with debt, more than double equity, at a debt/equity ratio of 2.3x. Yet, the return on equity is 89% plus a bit. With returns at that level, a company can afford to carry a lot of debt.

Looking more broadly at the financials, I rate them as so-so, and that's buttressed by the analysts' ratings, which are OK, but not wildly enthusiastic.

sym	bday	blevel	stop	2-day?
YUM	mar8	$51.64	$50.09	✔

YUM's last attempt at a bull breakthrough was stymied by large decline on the third day after breakout, at a level that is close to the early Nov. 4 swing high.

The same situation is in play. The price is at the top of range. It set a new swing high today, but only by 2¢ (so far). It will take some buying pressure to overcome that resistance, which has been a reversal area twice so far.

A breakthrough would carry the stock into blue-sky territory, at price levels never before seen by YUM. So it would be a significant event.

On the downside, the most recent swing low was on Feb. 23, and there was one lower still on Jan. 28.

Reversal Levels

• $52.49, +0.3% (today's swing high)
• $52.36 --- You are here.
• $50.44, -3.7% (20-day moving average)
• $48.56, -7.3% (feb. swing low)
• $46.27, -11.6% (jan. swing low)

Bottom line: With so much debt, with such a high return on equity, with middlin' financials in the broader sense, without high enthusiasm on the part of analysts, and with an tendency not to trend, I have alarm bells going off in my skull when I look at YUM.

I'll like YUM better if it makes yet another higher high on Thursday, as it has done today. A break above the $53 level would persuade me that the upside resistance no longer held.

I think YUM is worth riding up to earnings, which are nicely positioned five days after April options expire. But we're in analyst pontificating season for this stock, so it could be a roller coaster ride.

One thing about Yum! Brands: I'm struck by the second-tier nature of most of their U.S. holdings, with KFC as the exception. In my neck of the woods at least, these are not fast-food places where teens flock after school. So, just from a story-stock standpoint, that makes me consider YUM as something less than a first-class growth prospect.

Key

• chan: Channel phase, with green for bull trend, red for bear trend and yellow for neutral trend.
• adx: Average direction index location, indicating the strength, or the temperature, of the trend. Orange for 40 or greater, aqua (light blue) for 30 and up but below 40, magenta (light purple) for 20 and up but below 30, and brown for anything below 20. (Mnemonic: Orange for the overhead sun, blue for the surrounding sky, purple for sunset on the horizon and brown for the earth.)
• traj: Trajectory of the ADX, green for strengthening, red for weakening or yellow for unchanging. Note that if the adx column is orange and the trajectory column is red, then the position must be closed.
• psar: The parabolic sar, either green for bullish or red for bearish.
• bday: Breakout day, the day the price broke through the upper or lower 55-day price line.
• blevel: Breakout level, the price level of the line that was broken through.
• stop: The current stop/loss price. Early in a bull or bear phase, this will be 5¢ below the low or above the high, respectively, on breakout day.
• 2-day?: Marked with an "✔" if the two-day rule is in effect. Under the rule, if the price closes below the breakout level on each of the two days following breakout day, then the position must be exited.

About channel analysis

Read a detailed explanation of my channel analysis method, including trading rules.

Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.


No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.