Down more than 6% year-to-date, Sonoco has been underperforming its peers and the broader market. Fundamentally speaking, the stock trades at a relative discount to its peers as measured by earnings multiples, yet it offers a higher dividend yield than most at almost 4%.
On the charts, the stock is at a critical point. A solid move above an important resistance area could lead to a 10% gain in the stock. Below I will focus on three indicators for Sonoco's chart analysis: simple moving averages, Fibonacci retracements and momentum oscillators.
When looking at moving averages, I like to see how well a security has respected any given moving average in the past. In the case of Sonoco, the stock has, on average, shown good respect with regard to its 200-day simple moving average, decent respect for its 100-day moving average, and lousy respect for its 50-day moving average.
Currently, the stock is wedged between the 200-day and 100-day moving averages, where a break above the 200-day moving average around $31.70 would be a major accomplishment and significantly increase the chances for the stock to move toward $35.
On the other hand, a break below its 100-day moving average around $30.50 increases the chances of the stock retesting its July lows around $28.60, which came on major volume, thus increasing the chances that it was a major low.
The stock has traded below its 200-day moving average since mid-May, so a break above it would be a significant statement and likely lure fund managers into this underperforming name.
Last week, the stock completed a 50% retracement of its slide from the March highs to the July lows. Not coincidentally, this level corresponds to where the current 200-day moving average sits. In other words, the 200-day moving average at around $31.70 is further enhanced as a resistance zone by the 50% retracement. Therefore, a good break above that level is all the more significant and should lead to increased upward momentum.
The $31.70 area is a so-called "confluence zone" where multiple technical indicators come together to highlight a price level as significant support or resistance. For now at least, that is the main level traders and investors in the stock should watch.
For traders focusing a little more on Fibonacci retracements, the next resistance level at the 61.8% retracement of the March-July sell-off comes in at around $32.50. If the stock is able to overcome that resistance level as well, then the chances of reaching the target near $35 increase.
As far as momentum indicators go, my mantra is, "keep it simple." The chart below shows both the relative strength index (RSI) and the slow stochastic oscillator.
For a more important top, one would expect to see the RSI reach overbought levels at or above 70, such as it displayed at the top in March. The slow stochastic indicator is more responsive, and thus more volatile, but it too shows signs that the uptrend that began in July may continue.
In summary, the confluence resistance area around $31.70, if overcome, should give Sonoco enough momentum to eventually reach the $35 target price. A push above said level may also be enough to get underinvested fund managers to buy the stock as this relative underperformer may help them play catch-up with the benchmark indices.
The company's next earnings release is scheduled for Oct. 18, which is a date investors will want to keep marked on their calendars, as it could move the stock.
Action to Take --> Buy Sonoco on a breakout above the $31.70 resistance area. Set stop-loss at $29.80. Set initial price target at $35 for a potential 10% gain before year's end.
This article originally appeared on TradingAuthority.com: