Darden Restaurants, Inc. (DRI) stock traded to its all-time intraday high of $128.41 on Sept. 13. The parent of Olive Garden, LongHorn Steakhouse, The Capital Grill, Cheddar’s Scratch Kitchen, and Bahama Breeze was set up for a new high when the company reported earnings before the opening bell on Thurs., Sept. 19. Darden beat earnings per share (EPS) estimates but slumped on guidance.
The stock closed Friday, Sept. 20, at $119.80, up 20% year to date and in bull market territory at 25% above its Dec. 27 low at $95.83. The stock is 6.7% below its all-time high. Darden shares are slightly overvalued with a P/E ratio of 20.44 and a dividend yield of 2.94%, according to Macrotrends.
Darden is the world’s largest full-service restaurant operator with 1,500 locations and 150,000 employees. The reason for the stock decline was weak same-store sales. It seems like Olive Garden and LongHorn Steakhouse showed gains, but most of the other names did not.
The daily chart for Darden Restaurants
The daily chart for Darden shows the formation of a “golden cross” on March 11, when the 50-day simple moving average rose above the 200-day simple moving average to indicate that higher prices lie ahead. The stock was a buy that day at $107.41, which coincided with the 200-day simple moving average.
The close of $99.86 on Dec. 31 was an important input to my proprietary analytics. This resulted in an annual value level of $94.96, which is below the chart. The close of $121.73 on June 28 was another input to my analytics. The second half semiannual pivot at $122.25 has been a magnet since July 1. The quarterly pivot at $119.14 has been a magnet since Aug. 5. The stock peaked at $128.41 on Sept. 13, and its monthly pivot at $125.18 failed to hold on the negative reaction to earnings on Sept. 18.
The weekly chart for Darden Restaurants
The weekly chart for Darden is negative, with the stock below its five-week modified moving average at $121.89. The stock is well above its 200-week simple moving average, or “reversion to the mean,” at $89.32. The 12 x 3 x 3 weekly slow stochastic reading is projected to decline to 64.69 this week, down from 69.13 on Sept. 20.
Trading strategy: Buy Darden Restaurants stock on weakness to its 200-day simple moving average at $115.67, and reduce holdings on strength to its monthly risky level at $125.18. The semiannual pivot remains a magnet at $122.25.
How to use my value levels and risky levels: Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual, and annual closes. The first set of levels was based upon the closes on Dec. 31. The original annual level remains in play. The weekly level changes each week. The monthly level changes at the end of each month, most recently on Aug. 30. The quarterly level was changed at the end of June.
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. 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.”