Denny’s Breaks Out as Restaurants Rally

02/09/2011 9:40 am EST

Focus: STRATEGIES

Thomas Aspray

, Professional Trader & Analyst

The Dow Jones Restaurant index is up 4.7% in the past seven days, suggesting that this industry group may start to catch up with the rest of the market. One restaurant stock that I liked last month was Denny’s Corporation (DENN), which has just staged a strong breakout. So what should you do with your long position?

chart
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Chart Analysis: DENN moved through the daily resistance at $3.84 at the end of January and has now overcome long-term resistance at $3.99-$4.10 that goes back to 2008. This is positive for the intermediate term.

  • The major 61.8% resistance is at $4.30 with weekly chart resistance next in the $4.70-$5.00 area

  • The daily on-balance volume (OBV) has also broken out to the upside and the weekly OBV is still leading prices higher, just as it was last month

  • Initial support is now in the $4.00 area with stronger support at $3.80-$3.85

  • There is major support in the $3.60-$3.75 area

  • Earnings will be released after the close on February 15
The Dow Jones Restaurant group was strong again on Tuesday and closed above the highs from January.
  • The next important resistance is at 613 and a move above this level should confirm a new uptrend

  • The December 2010 highs are at 632.6

  • The daily OBV has moved well above its weighted moving average (WMA) and trend line resistance, which is positive

  • There is first support in the 590-595 area

  • The recent correction held well above the major 38.2% support in the 575 area

  • The relative performance (RS) line has turned up but it is too early to be sure that a bottom has been formed

What It Means: For DENN, the chart is quite positive, and anyone who bought this stock since June of 2008 now has a profit. There are some early signs that the restaurant group has bottomed. From the December 7 highs to yesterday’s close, the group is down 4.3%, as compared to a gain of 8.3% by the S&P 500.

How to Profit: I gave two ways to establish a long position in DENN on January 19. Aggressive traders should have bought DENN at $3.64-$3.73 as it traded to a low of $3.60 the next day and held under $3.73 for several days. On longs from $3.73 or better, use a stop at $3.67. Sell half the position at $4.77 and then raise the stop to $3.97.

Alternatively, I recommended that on a close above $4.10, one should buy at $4.04 or better with a stop initially at $3.47. Monday’s close was at $4.10, followed by a close of $4.13 on Tuesday, so this order would not have been filled. I would now buy at $4.06 or better with a stop at $3.67.

Tom Aspray, professional trader and analyst, serves as senior editor for MoneyShow.com. The views expressed here are his own.

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