Constellation Brands, Inc. (STZ) reported better-then-expected earnings before the markets opened this morning, and shares are headed higher. The owner of many brands of beer, wine and spirits – including the popular Corona and Modelo beer franchises – is seeing its stock head for a test of its 200-day simple moving average at $194.86. The weekly chart is positive as the stock pops above its "reversion to the mean" at $176.43.
Analysts were expecting Constellation Brands to report quarterly earnings per share of $1.72, and the beat came in at $1.84 per share. The sale of some wine and spirits brands to Gallo for $1.7 billion helped drive the positive results. Constellation Brands also decreased its valuation of its stake in Canopy Growth Corporation (CGC), which is a play in the cannabis industry.
The daily chart for Constellation Brands
Constellation Brands stock has been under a "death cross" since Aug. 8, when the 50-day simple moving average declined below the 200-day simple moving average to indicate that lower prices would follow. This tracked the stock from $214.41 that day to its Jan. 9 low of $150.37.
The close of $160.82 on Dec. 31 was input to my proprietary analytics and resulted in annual and semiannual risky levels at $215.75 and $244.05, respectively. The March 29 close of $175.33 was the latest input to my analytics and resulted in a monthly value level at $161.57 and a quarterly risky level at $236.96. A weekly value level is $170.24.
The weekly chart for Constellation Brands
The weekly chart for Constellation Brands is positive, with the stock above its five-week modified moving average of $175.17. The stock is also above its 200-week simple moving average, or "reversion to the mean," at $176.45. The 12 x 3 x 3 weekly slow stochastic reading is projected to rise to 71.81 this week, up from 63.25 on March 29. At the Jan. 9 low, this reading was 9.51, with a level below 10.00 making the stock "too cheap to ignore."
Trading strategy: Buy Constellation Brands shares on weakness to the 200-week simple moving average at $176.44. Reduce holdings on strength to the 200-day simple moving average at $194.87 and then to the annual risky level at $215.75.
How to use my value levels and risky levels: Value levels and risky levels are based on the last nine weekly, monthly, quarterly, semiannual and annual closes. The first set of levels were based on the closes on Dec. 31. The original semiannual and annual levels remain in play. The weekly level changes each week; the monthly level was changed at the end of January, February and March. The quarterly level was changed at the end of March.
My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in already. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.
How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.
The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.
The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. Recently, I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble," as a bubble always pops. I also refer to a reading below 10.00 as "too cheap to ignore."
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.