Papa John's International, Inc. (PZZA) shares rallied more than 8% on Wednesday in reaction to reports that ousted chair and founder John Schnatter had contacted private equity firms to discuss a sale. The rally mounted the unfilled July 23 gap posted when the board of directors approved a "limited duration" rights plan designed to keep the largest shareholder from seizing control of the company.

The news could trigger short-term trading opportunities in the coming weeks, but there are reasons to remain skeptical. For starters, it's hard to assign a value to the company following this year's bizarre events because the long-term fallout is still too hard to evaluate. In addition, a similar report was posted in The Wall Street Journal just five days before the rights plan was issued, suggesting that unknown parties may be planting rumors to keep short sellers on the defensive. (See also: Papa John's Stock Faces Long Road to Recovery.)

PZZA Long-Term Chart (1993 – 2018)

The company came public at a split-adjusted $2.00 in 1993, entering a choppy uptrend that topped out at $11.85 in 1999. Price action settled into a long-term trading range at the turn of the millennium, bounded by support at $4.75. A 2005 breakout posted decent gains, stalling at $18.98 in 2006. That peak marked the highest high for the next five years, ahead of a multi-wave decline that accelerated during the 2008 economic collapse.

The downtrend ended at $6.39 in November 2008, just above the low posted in the first half of the decade. The subsequent recovery wave reached the 2006 high in 2011, yielding an immediate trend advance that posted the strongest returns so far this century. Buying pressure stalled in the upper $70s in July 2015, giving way to a steep pullback followed by a breakout that posted an all-time high at $90.49 in December 2016.

The stock has carved a volatile series of lower highs and lower lows since that time. Industry margin pressure generated the first part of the decline, which accelerated in reaction to the November 2017 scandal. Even so, price action held support at the 2016 low until Schnatter's July resignation triggered a breakdown that ended in the upper $30s in August. A healthy bounce remounted that level quickly, setting off a failed failure signal that raises the odds for a tradable low.

The monthly stochastics oscillator fell into the oversold level in July 2017 and has stuck like glue to that extreme reading for more than a year, signaling a potential exhaustion event. It has turned higher in the past two months but needs to mount the second quarter peak (red line) to confirm a new buying signal. That thrust could work well with market-timing strategies, adding to the technical improvement generated by August's failed breakdown. (To learn more, see: Stochastics: An Accurate Buy and Sell Indicator.)

PZZA Short-Term Chart (2017 – 2018) 

The decline into 2017 reached the 200-day exponential moving average (EMA) in February, generating mixed action into an August sell-off that confirmed resistance at that level. January and April 2018 bounces have failed to pierce this barrier, which is situated just four points above Wednesday's closing print. Meanwhile, the stock just mounted the 50-day EMA near $47 on heavy volume, suggesting that the two moving averages may constrict price movement well into the fourth quarter.

A Fibonacci grid stretched across the five-wave pattern going back to January 2018 (blue lines) could offer actionable insight in coming sessions. The mid-week rally reached resistance at the .382 retracement level, which has aligned with the July 23 breakaway gap.  At the same time, the 200-day EMA has aligned with the 50% level while the .618 retracement crosses through the unfilled May 9 gap. That gap marks a final barrier that must be crossed to improve the long-term technical outlook. (See also: Papa John's Adopts Poison Pill vs. Founder: WSJ.)

The Bottom Line

Papa John's stock is grinding higher in reaction to buyout rumors. Aggressive traders may wish to buy a pullback to 50-day EMA support near $46.50 in this scenario, but trend followers should wait until the stock mounts tough resistance at the 200-day EMA in the low $50s. (For additional reading, check out: Should You Invest in Pizza Restaurant Stocks?)