Shares of The Kraft Heinz Company (KHC) got crushed overnight, dropping more than 20% after missing fourth quarter estimates, disclosing an investigation by the SEC into company accounting practices and slashing the quarterly dividend by 36%. The news struck like a sledgehammer, triggering a vertical slide that carried more than 10 points in less than two hours. The stock is posting new lows ahead of Friday's opening bell, setting the stage for additional downside into the weekend.

Wall Street analysts expected earnings before interest, taxes, depreciation and amortization (EBITDA) to grow in the fourth quarter, but the food giant failed to deliver, reporting a 13.9% year-over-year decline. The company also recorded a $15.4 billion loss on the Kraft and Oscar Meyer brands, adding to a laundry list of reasons that retail and institutional shareholders are abandoning ship, all at the same time.

The company accelerated profit growth with aggressive cost cutting after 2015's $49 billion merger of equals but eked the last savings from that accounting process at the end of 2017. They invested heavily in marketing and rebranding to rebuild growth in 2018, but the efforts have backfired, with limp results and accounting procedures that have attracted the unwelcome attention of government regulators.

KHC Long-Term Chart (2012 – 2019)

Long-term chart showing the performance of The Kraft Heinz Company (KHC)
Worden's TC2000

Kraft Foods, Inc. spun off food and beverage operations into Mondelēz International, Inc. (MDLZ) and Kraft Foods Group in September 2012. The common stock for this entity came public at $35.42 and eased into a narrow trading range with support in the lower $30s and resistance in the upper $30s. It broke out in the first quarter of 2013, entering an uptrend that stalled in the upper $40s a few months later.

The rally made little progress above that resistance level until March 25, 2015, when the Kraft-Heinz merger announcement triggered a 15-point rally gap into the low $70s. Price action hovered around that level for more than a year, consolidating gains while awaiting government approvals. The stock turned higher once again in May 2016, carving a two-legged advance into February 2017's all-time high at $97.77.

A pullback into September 2017 completed a double top breakdown, followed by large-scale selling waves that ended within six points of the 2012 offering in December 2018. The stock is trading under that low ahead of Friday's open and could test 2012's all-time low at $33.81 in the coming sessions. Meanwhile, the weekly stochastics oscillator hit the overbought level ahead of the news as the monthly indicator crossed into a buy cycle. This conflict supports rapid but short-lived downside, suggesting that the decline will end quickly.

KHC Short-Term Chart (2016 – 2019)

Short-term chart showing the performance of The Kraft Heinz Company (KHC)
 Worden's TC2000

The on-balance volume (OBV) accumulation-distribution indicator posted an all-time high in June 2016, more than seven months ahead of price, and entered an aggressive distribution phase that has now penetrated the majority of massive accumulation that followed the 2015 merger announcement. This signals wholesale abandonment by institutional investors despite well received business plans and many quarters of upbeat commentary. Unfortunately, the stock will now add to that destruction, dumping this volume measurement into another multi-year low.

Shareholders trapped in the overnight crash should watch price action around the trading range posted right after the 2012 offering. This is tougher than it sounds because many charting programs begin Kraft coverage with the 2015 merger, and the stock has already hit an all-time low in that view. Conversely, the trading range starts at $38.64 and ends at an all-time low under $34 on longer-term price histories, offering final support. Ominously, the decline has reached with two points of the low with an hour to go before the regular session.

The Bottom Line

Kraft Heinz stock has dropped more than 25% after a nightmarish fourth quarter that could undermine long-term business objectives and profitability. Given the extremely bearish technical outlook, dip buyers and value hunters should stand aside until the dust settles.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.