Brocker.Org: Yum Brands Headed for Breakout After Earnings

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Restaurateur Yum Brands, Inc.’s (YUM) 2016 decision to spin off its Chinese operations into Yum China Holdings, Inc. (YUMC) is finally bearing fruit, with the parent company beating EPS and revenue estimates in Wednesday’s first quarter earnings report while reiterating lofty 2019 guidance of $3.75/share. The bullish metrics have triggered a strong advance that’s now testing two-year resistance in the upper-60s.

The spinoff is firing on all cylinders as well after breaking out above 5-month resistance at 30 in April and heading into a month-long string of new highs. Taken together, these worldwide purveyors of Taco Bell, KFC, and Pizza Hut are set to post outsized gains for the rest of 2017, despite a challenging restaurant environment that’s posted weak comparative sales in the last two years.

YUM Long-Term Chart (1997–2017)

The company came public in October 1997 at $5.59, after adjustment for three stock splits, and took off in a 1998 uptrend that reached $13.28 in April 1999. It then turned tail, losing points at an equally vigorous pace until posting an all-time low at $4.24 in August 2000. A bounce off that level stalled two points under the prior high in 2002, denying a breakout until the second half of 2004 when the stock took off in a major uptrend.

The rally peaked just above $29 in 2007, giving way to sideways action that broke to the downside during the 2008 economic collapse. Selling pressure settled at a 4-year low in November while a 2009 support test completed a double bottom reversal, ahead of a strong recovery wave that reached a new high in 2010. Good vibes intensified into 2015 when the stock finally topped out in the upper-60s and sold off in a major correction.

The decline found support in February 2016 at the 2013 low in the mid-40s and took off in a strong recovery wave that stalled in September just 3-points below 2-year resistance. The November 2 spinoff yielded a major low, ahead of a bounce that gained steam into February 2017 when the stock reached the 2015 high. Price action since that time has carved a rounded pullback that’s now completed a multi-year cup and handle breakout pattern.

YUM Short-Term Chart (2015–2017)

YUM

The 2015 decline unfolded through a series of volatile waves that trapped long and short-term traders on both sides of the aisle. High volatility continued into the first quarter of 2016, highlighting an intense conflict finally won by bulls in March when the stock exited the 5-month basing pattern into an uptrend that recaptured support at the 200-day EMA just a few sessions later.

The second half of 2016 proved tough for profit-building because the spinoff news triggered confusion and second-guessing, with Wall Street analysts worried the new company would undermine the parent’s performance. Institutions and the public set aside those fears after the November offering, generating a strong rally back to steep 2015 resistance in the upper-60s.

There’s still work to do because On Balance Volume (OBV) has failed to match price action, topping out in October 2016 and drifting lower into April 2017, even though the stock is now trading near a 2-year high. However, this volume-based indicator may be generating false readings due to the spinoff, which included a complicated split formula that may not reflect actual investor demand in the last six months.

The Bottom Line

Yum has charged back to resistance at the 2015 high after a strong first quarter earnings report, completing a cup and handle breakout pattern that supports a rally to $90 as a measured move target. Market timers may choose to ignore a bearish volume divergence due to complex accounting in the Yum China spinoff and jump in ahead of an expected breakout.

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