Kraft Heinz Stock Bottoming Out After Long Downtrend

The Kraft Heinz Company (KHC) may have bottomed out following a brutal two-and-a-half-year downtrend that relinquished more than 70% of its value. If so, new shareholders will enjoy the double benefit of higher prices and a healthy dividend yield, making it an attractive long-term investment. However, Rome wasn't built in a day, and the food giant will face headwinds and a two-sided tape until it absorbs massive overhead supply between the mid-$30s and upper $40s.

The stock rallied more than 12% last week after the company beat third quarter profit estimates and posted in-line revenues. The "better-than-feared" news triggered heavy short covering and buying pressure, ending a string of post-earnings downdrafts that contributed to a long series of all-time lows. Even so, the 2019 Stabilization Plan outlined during the earnings presentation will take years to execute, keeping a lid on sentiment, valuation, and price appreciation.

The lack of details will also make it harder for sidelined investors to take the plunge in the coming weeks. For example, the presentation highlight entitled "Near-Term Transformation" features a laundry list of popular business double-speak, including the intention to "diagnose key focus areas," "make critical fixes," and "capture efficiencies." It appears that Wall Street has taken notice of this intentional vagueness, issuing zero upgrades since last week's release.

KHC Long-Term Chart (2013 – 2019)

(TradingView.com chart starts with the 2015 Heinz merger)

The common stock for current operations sprang to life in September 2012 when Kraft Foods spun off food and beverage operations into Mondelēz International, Inc. (MDLZ) and Kraft Foods Group. It opened the first session at $35.42 and dropped into a narrow trading range, bounded by support in the lower $30s and resistance in the upper $30s. A range breakout in the first quarter of 2013 yielded a modest uptick that stalled in the upper $40s a few months later.

Price action ground sideways to higher for the next two years, finally taking off in a vertical buying spike in March 2015 when the Kraft-Heinz merger announcement generated a 15-point gap into the low $70s. The nascent uptrend made little or no progress into May 2016, finally giving way to a channeled advance that added more than 20 points into February 2017's all-time high at $97.77.

The subsequent pullback broke down from a double top pattern in September 2017, establishing heavy resistance in the upper $70s. It tested that barrier into the first quarter of 2018 and dropped like a rock, descending at a rapid pace into December when it finally filled the 2015 gap near $50. A bounce into that level stalled into February 2019, generating a large sell gap between the mid-$30s and upper $40s that could take many months to fill, despite the recent uptick. 

The weekly stochastics oscillator crossed into a buy cycle in August 2019 and has now reached an overbought level that has generated four reversals in the past two years. Meanwhile, the monthly oscillator is engaged in a buy cycle that hasn't reached the overbought level. Taken together, the stock could add a few points in the coming weeks, but the upside potential appears limited, especially with selling pressure likely to increase substantially in the mid-$30s.

KHC Short-Term Chart (2018 – 2019)

Last week's rally hit resistance at the .382 Fibonacci retracement of the last selling wave, as well as 200-day exponential moving average (EMA) and swing highs going back to March 2019. In turn, this looks like a bottoming pattern that will carve additional pullbacks before the stock mounts a successful assault on the big April gap. A decline into the 50-day EMA at $28 could offer a low-risk buying opportunity in this scenario because it might draw the right shoulder of an inverse head and shoulders pattern.

The on-balance volume (OBV) accumulation-distribution pattern also advises caution, lifting back to resistance generated by the sell gap. It's moving in lockstep with price action and could complete an identical inverse head and shoulders pattern in coming months. Along with other technical and fundamental metrics, the set-up tells long-term market players that they may wish to stand aside for now and wait for a lower price to get on board.

The Bottom Liner

Kraft Heinz stock has finally bottomed out after a long downtrend, but it could take months to generate sustained upside.

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