Pepsi Stock Tests Key Chart Support Ahead of Earnings

PEP stock has pulled back to a crucial technical level

Managing Editor
Feb 12, 2018 at 12:17 PM
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PepsiCo, Inc. (NASDAQ:PEP) is slated to report fourth-quarter earnings before the open this Tuesday, Feb. 13. The stock has a history of muted earnings reactions, according to Trade-Alert; over the past eight quarters, PEP has averaged a one-day post-earnings move of just 0.5%, regardless of direction. This time around, however, the options market is pricing in a bigger-than-expected post-earnings price swing of 4.2%.

Like many equities right now, PEP's short-term implied volatility (IV) is remarkably inflated. The current 30-day at-the-money IV checks in at 22.9%, in the 99th percentile of its annual range -- indicating that short-term options have rarely been more expensive, from a volatility standpoint. To put that implied share price move in perspective, PEP's 30-day realized volatility is at a new annual high of 20.5% as of this writing.

On the charts, Pepsi stock pulled back with the broader equities market last week. At Friday's intraday lows, the stock was down more than 11% from its Jan. 23 record high of $122.51. Now, however, the security is testing its 100-week moving average, which currently coincides with a 50% Fibonacci retracement of its December 2016 low to the January high.

Following the sharp pullback, PEP is recovering from a drop into oversold territory. Its 14-Day Relative Strength Index (RSI) stands at 32, up from a low of 22 late last week. At last check, the equity was up 0.7% to trade at $111.93.

Fib Levels PEP

Looking toward sentiment data, PEP's Schaeffer's put/call open interest ratio (SOIR) of 0.34 is docked below 95% of comparable readings taken in the past year. This low reading suggests that short-term speculators have rarely been more call-skewed toward the stock during the past 12 months.

Analysts are also relatively upbeat. Susquehanna today upped its price-target on PEP to $140 from $137, implying expected upside of about 26% from Friday's close. More broadly, eight out of 14 analysts tracking Pepsi shares have handed out "buy" or better ratings.

So while the technical stage is set for a PEP rally, there's a healthy amount of optimism priced into the stock already. Unless the food giant unveils a major upside surprise, we might simply see a quiet continuation of the equity's longer-term uptrend following the report. If so, traders who bought the stock's pricey pre-earnings call options could wind up disappointed, even if the directional move is in their favor.

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