Did Cracker Barrel just signal an imminent reverse?

The fuel that propelled shares of Cracker Barrel to the moon over the past 8 years may be running lows. Cracker Barrel ($CBRL) was downgraded to hold from buy today when Maxim Group released this news. The stock found support today at $160 but hasn’t really shown a lot of nitrate to push back up to the post earnings $170 level. Investors may be nervous about more downgrades and unwilling to press the pedal any further until more news is available.

The candle stick pattern that Cracker Barrel (symbol $CBRL) formed on 11/23/2016 is called a bearish star. So far this bearish indicator has followed the rules for this candle stick pattern nicely (see rules below chart). This indicates further downside action for the stock.

 

cbrl

The shooting star is made up of one candlestick with a small body, long upper shadow and small or nonexistent lower shadow. The size of the upper shadow should be at least twice the length of the body and the high/low range should be relatively large. Large is a relative term and the high/low range should be large relative to the range over the last 10-20 days.

For a candlestick to be in star position, it must gap away from the previous candlestick. In Candlestick Charting Explained, Greg Morris indicates that a shooting star should gap up from the preceding candlestick. However, in Beyond Candlesticks, Steve Nison provides a shooting star example that forms below the previous close. There should be room to maneuver, especially when dealing with stocks and indices, which often open near the previous close. A gap up would definitely enhance the robustness of a shooting star, but the essence of the reversal should not be lost without the gap.

There is a gap to fill between $160 and $155 and it wouldn’t surprise me to see that gap get filled before the end of this month. Especially because  the highest open interest is at the $155 strike with over 1300 Put options contracts open.

cbrloi

 

Since November 2008 the stock has gone from $11 a share up to $170 a share. If a recession happens in the near future, watch for this stock to be cut in half.

cbrl10yr

Moreover, in a recent CNBC article outlining the current market landscape, Bob Doll said, “For the last few years, the search for yield, perceived safety and low volatility has been an investor’s dream, and billions and billions and billions have gone into those things. That is over and done and it’s unwinding. That is because the economy is doing better and inflation is picking up a bit”.

This could be a head wind for Cracker Barrel  which has a %4.78 yield. If investors pull out of high yield stocks in search of performance a double edge sword may cut deeper into the “billions and billions” of shareholder gains. A long term negative outset may also be contingent on growth. If the company is stalling, as perhaps indicated in the latest earnings report, the balance sheet could take more cash flow and total asset decreases. As long as the company maintains “Wall Street” standards and can mask the slow growth by a higher EPS then the stock may find a floor. If not, and things get ugly I foresee much bigger losses for the company.

The best trades are the ones in which you have all three things going for you, fundamentals, technicals, & market tone. Full disclosure, I am short $CBRL.

Follow me on Twitter @Jeffreytief

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