A PepsiCo (PEP) downgrade Monday may be the catalyst that officially marks the top in the stock and reverses the long-term uptrend in the consumer staples sector. Jefferies downgraded the beverage and snack food maker to hold from buy and slashed its target price from $133 a share to $108 a share.
The stock is currently down 1.4% in the session and has broken through a zone of support, delineated by its two 200-day moving average and the 38% retracement level of the December 2016 low and last month’s high.
PepsiCo shares have been moving sideways since June, in what first looked like a bullish head-and-shoulders continuation pattern, but which quickly flipped-over to a bearish head-and-shoulders topping pattern. The inverse head-and-shoulders pattern formed under a neckline in the $117 area, with the July low acting as the head.
The right shoulder of this pattern now looks like the left shoulder of the head-and-shoulders top that followed, with the August high as the head and the neckline at the $114 level. As these patterns develop, the moving average convergence/divergence indicator can be seen tracking lower in bearish divergence to the stock price. The $114 neckline was broken two weeks ago and the stock price quickly dropped to the red zone of support.
Following Monday’s downgrade, PepsiCo shares opened lower and broke below the zone of support and their 200-day moving average. The Consumer Staples Select Sector SPDR ETF (XLP – Get Report) chart shows what this breakdown could mean for the entire sector.
PepsiCo accounts for 5.2% of the holdings in the XLP and a shift in the direction of the stock will have a negative effect on the direction of the fund price. The XLP has been forming a topping pattern of its own for the last seven months and is retesting an intersection of support between its 40-week moving average and horizontal support at the $54 level.
Moving average convergence/divergence made a bearish crossover in June and Chaikin money flow moved into negative territory. The Bollinger bandwidth reading is at a level that reflects narrow compression in the band range and low volatility. Periods of low volatility are often followed by periods of high volatility, so if the PepsiCo downgrade is enough to pull the XLP below its support level, any subsequent move lower could be sudden and sharp.