Shares of Monster Beverage (NASDAQ: MNST) soared almost 8% Friday to fresh all-time highs after the company reported better-than-expected earnings.
While the stock remains attractively positioned in the longer term from a technical perspective, the daily chart has grown increasingly steep since late August, and Friday's rally took it vertical.
On Thursday after the close, Monster reported earnings for the third quarter increased 32% year over year to $0.70 a share, beating estimates for $0.68. Sales grew 8% from the same quarter a year ago, but revenue of $636 million was below the $642 million estimated by analysts.
Following the earnings report, brokerage firm Stifel Nicolaus reiterated its "buy" rating on the stock, raising its price target price to $115 from $110. Credit Suisse (NYSE: CS) also restated its "outperform" rating and bumped its target to $115 from $98.
Their target sits about 7% above current prices, but the charts say traders have a better chance at making profits on the downside here.
After an exhaustive run into June 2012, MNST sold off hard over the next five months, falling to the 61.8% Fibonacci retracement line of the entire late 2008 to 2012 rally.
The stock then resumed its advance, hitting a peak in February 2014. Shares consolidated from there until they moved significantly higher in mid-August, after the company announced it had entered into a long-term strategic partnership with Coca-Cola (NYSE: KO). This major breakout took MNST cleanly above its previous all-time highs from May 2012.
The longer-term trend remains up. But given the slope of the ascent, it is highly probable investors will get a better price to buy while traders should play the short side.
When a stock with an already steep slope jumps higher in a vertical fashion, it is often only a matter of time before it reverses lower. Traders then simply need to look for exhaustive price action to signal a mean-reversion move lower.
When the stock in question is a momentum stock, as MNST is, favored by the trading community and being chased higher by hedge funds, it is also important to watch the broader market closely.
Currently, the broader market rally off the mid-October lows has forced many active funds to cover short positions they opened near the October lows and chase the market higher using high-beta stocks as their vehicle for leverage. As such, when the broader market starts to signal a bearish reversal, it will likely coincide with a mean-reversion move in MNST.
On the daily chart below, we see MNST nicely consolidated its big August up-gap move, bumping into its rising 50-day simple moving average in mid-October, then resuming the uptrend.
But with Friday's post-earnings rally, the stock is now up about 20% in less than a month. Even the most aggressive traders should be hesitant to chase it higher. A mean reversion back to the $95-$100 area in coming weeks looks likely and would work off some of the overbought readings in the stock.
My advice is to short MNST on a move above $109 or after the next failed intraday rally.
Recommended Trade Setup:
-- Sell MNST short above $109 or on a bearish reversal
-- Set stop-loss at $113.50
-- Set initial price target at $98 for a potential 10% gain in 3-4 weeks
This article was originally published on ProfitableTrading.com: Watch Out for a Bearish Reversal in This Popular Stock