Grab a Cup of Coffee or 2

• Posted by Greg Harmon
• on May 3rd, 2011

Green Mountain Coffee (ticker:$GMCR) and Peet’s Coffee & Tea (ticker:$PEET) both report earnings after the bell today. Both of these stocks have had big moves higher in early March but have reacted differently since then.

Green Mountain Coffee

GMCR has been in a bull flag and recently looking like it might break higher. It has a Moving Average Convergence Divergence (MACD) indicator that is improving and Simple Moving Averages (SMA) that are all sloping higher. Also it has Bollinger bands tight enough even a mouse would have trouble squeezing through. Its Relative Strength Index (RSI) however, is diverging lower.

Peet’s Coffee & Tea

PEET has been printing a downward sloping bull flag after its run higher. Its MACD is also improving and has upward sloping SMA’s but it is testing the support of the 50 day SMA. It’s RSI is also more pronouncedly negative, under the mid point.

Both are decent long set ups, but it is likely that if one fades so will the other. So how do you set up for earnings? The clue is in the ratio chart.

GMCR vs PEET

This chart shows a clear rising trend since both moved strongly higher, and a test of the high at 1.44. The RSI has the same trend as each name and the MACD is improving like both stocks, but this chart look the best of the three. Buy the ratio heading into earnings buy buying 100 shares of GMCR for every 143 shares shorted of PEET. Use a ratio of 1.40 as a stop for a potential loss at about $137-140 per pair, or buy a May 60/55 put spread on GMCR for 85c, and a May 50/55 call spread on PEET for 60c, a total of 1.45, or $145 per trade, to hedge downside risk.

As always you can see details of individual charts and more on my StockTwits feed and on chartly.)

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