So yesterday this looked like a short, but as if to annoy us and prove us wrong, the stock shoots up almost $6, or 7%. So just to make sure we are not completely offside on this stock, we took another, in depth, look. This EW stuff is like doing a puzzle of a blue sky, you cannot see a thing for the longest time and then. all of a sudden everything rapidly falls in place. This is a two+ year expanding diagonal triangle, 5th wave that completes this entire bull run. What is more, we are 99% sure of this.

First of all, looking at the Bigchart, you will notice that wave 5 travels the exact same distance as wave one. This is a perfectly normal phenomenon when wave three is extended.  Next, the whole thing adheres nicely to the channel even though the possibility of a quick $5 throw-over to the uppermost trend line cannot be entirely excluded.

   Looking at the shorter term chart the wedge is clearly visible and defined by no less than 8 touch points. We are using a semi-log scale as it shows better. This wedge is different than the “normal” one in that the amplitude of the moves increases rather than decreases.  In the end it resembles a horn. The main characteristic of these wedges is that they are ending patterns. Typically the stock reverses on a dime and drops, rather violently, back to at least the base of this structure. In plain English, this stock will trade at $57.50 or less sometime into the near future – typically in half the time or less that it took to go up, so roughly in six months to a year.

    Also take note of the very accurate predictive value of the RSI and MACD, individually or combined. The red vertical lines are occurring at an ever increasing frequency and are basically done. This should be traded with options;

These are the puts as per Bigcharts as of yesterdays close. The October option is 5 1/2 month away from expiry, sufficiently long to do the trick but not too long to make it unreasonable expensive. If you buy, for instance, the 90 strike – just a little out of the money – the ask is $5.70 and in our scenario the value of the option should rise to roughly $30, that is 5X! Interestingly there is a gap at about $82 and it would not be surprising if the stock drops so rapidly that it leaves behind an island. As always, talk to your broker.

Fundamentally speaking YUM! owns about 7000 restaurant outlets in China, mostly KFC. This is their largest revenue source. So Yum is actually a great China play. in disguise.

For a count see our previous blog of mid 2013. It was at $75 at the time and has not moved all that much since. Again we think it is peaking perhaps for no other reason than that we simple cannot fathom why a restaurant chain called “Yum” should trade at 38x earnings. We know that Americans spend more disposable income eating out than they do in the grocery stores but from $10 to $80 in 11 years??

More importantly we noticed that on this stock both the RSI and MACD, together or severally, are extremely efficient and accurate coincident indicators. Each and every time they alert you to a drop of about 10% and this time there is reason to believe that it may go quite a bit further.

This is option stuff. The stock should drop rapidly (say in 3 months) to the base of the last wedge, that is $66. A July 82.5 put is offered at $2.34. That option should be worth 4 to 6 times that at or before expiry. As always talk to your broker.  The same June option is offered at $1.40. Normally I prefer slightly longer options but this is one of those cases where shorter might be better, but consult with your broker.

A fortnight or so ago we suggested that this stock was a sell. The wedge appears to be completed at about $75. As each subdivision in this wedge like structure must itself subdivide in a three wave affair, you cannot ever be absolutely certain that you are at the end of the ride. Even so you should always assume that you are simple because the upside potential is considerable smaller than the downside. An active trader might consider buying back his short and taking the 8% gain, all other mortals should stay with the original trade as either way $59 is on the horizon.

If you check previous blogs you will see that this stock looked like a sell once it reached $74. The middle top was viewed as a peak in a wedge, incorrectly as it happens. Nine months later the stock repeats the process by going a single dollar higher but now doing it in a picture perfect wedge, always a 5th wave at least of some degree. Can we be absolutely certain that this is it? No, but how about 99%. For one thing the p/e is close to 24, double the going rate, the RSI and MACD are starting to deteriorate and we are not sure that the franchise restaurant model is going to be nearly as attractive in the future as it was in the past. Our initial target would be about $20 below the peak and ultimately $22 would not be out of the question. The company , apparently, has quite a bit of exposure to China.