Darden Bounces to Resistance After Bullish Earnings

Darden Restaurants, Inc. (DRI), holding company for Olive Garden and a basket of lesser-known franchises, beat fiscal second quarter EPS estimates by a penny in Tuesday's pre-market release, while revenues rose 4.9% year over year. The company also raised 2019 guidance by a few clicks while forecasting 2.5% same-store sales growth. The metrics triggered a minor positive reaction, but an illiquid tape ahead of the opening bell could be deceiving.

The company holds a $12.4 billion market cap and 19x forward yield, which compares favorably to rivals with lower multiples. Activist shareholders pushed for this higher valuation through key divestitures, highlighted by the 2014 sale of Red Lobster, the world's largest seafood chain. Industry experts are still debating the wisdom of that move, with the newly independent franchise now reporting positive sales growth.

The stock posted an all-time low at a split-adjusted $4.03 in 1997 and turned higher, entering a strong uptrend that topped out in the mid-$20s in 2002. A year-long decline found support in the mid-teens, giving way to a slow-motion recovery wave that completed a round trip into range resistance in January 2005. It broke out two months later, carving a series of higher highs and higher lows into the 2007 top at $42.62.

The subsequent decline unfolded through two vertical selling waves, with the second impulse gathering momentum through the 2008 economic collapse. It bottomed out in November after posting a seven-year low in the lower teens and bounced in a multi-wave recovery that reached the prior high in 2010. That peak marked the start of an apathetic tape, with price action stuck for four years in a narrow trading range between the mid-$30s and low $50s.

The stock cleared range resistance after the Red Lobster sale, entering an uptrend that stalled in the mid-$60s in 2015. It resumed its upward trajectory following the presidential election, hitting an all-time high at $117 in September 2018, while a downturn through the fourth quarter has dropped the restaurateur to a six-month low. The monthly stochastics oscillator crossed into a sell cycle right after the rally peak, predicting relative weakness into the first quarter of 2019.

A Fibonacci grid stretched across the two rally waves since September 2017 organizes recent price action, highlighting a major breakdown at the 50% retracement level, 200-day exponential moving average (EMA) and psychological support at $100. This sell-off has also completed a head and shoulders breakdown that now targets a 100% retracement into the mid-2017 low near $80. A rally above $105 is needed to cancel these sell signals and restore the bullish technical outlook.

The stock was trading around $100 ahead of the opening bell, so far failing to remount new resistance. This level could stick like glue, with triple witching options expiration on the calendar, but it will take substantial buying power to reach the critical $105 level. Given the high stakes, it is recommended that market players pull up their intraday charts, looking for more potent buying interest.

The on-balance volume (OBV) accumulation-distribution indicator fell to a six-month low this week, but the relatively weak downtick isn't confirming the recent technical breakdown. In addition, prior sell-offs through the 200-day EMA in 2016, 2017 and early 2018 eventually marked buying opportunities, while the trendline formed by the past three events (black line) now highlights the importance of the .786 retracement level near $90. That will be the key downside level to watch if bears resume control in the coming sessions.

Darden stock broke major support between $100 and $105 on Monday, while this morning's pre-market action has generated a modest uptick that could test new resistance.

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