It was just Wednesday that Reynolds American (RAI) reported lower-than-anticipated quarterly earnings and sank to a one-year low, but that third-quarter miss has quickly become a page 16 story as British American Tobacco (BTI) announced today a $47 billion cash and stock takeover bid at $56.50 per share of RAI.
Though I passed the Series 86 exam, I am in no position to analyze the deal. Above my pay grade, as they say. But I can look at the charts and give my two cents.
In this daily chart, above, we can see how RAI corrected lower from a July peak. Prices declined from around $54 to a tad below $44 the other day. Sell signals kicked in as prices broke below the 50-day moving average and its slope turned negative. The 200-day average was broken and we saw a bearish death cross of these two averages at the end of September.
But let's look closer. Notice the action of the On-Balance-Volume (OBV) line. The OBV line remained steady as prices declined. Sellers were not aggressive and new buyers were quietly buying and thus the line did not decline. Now look in the lower panel with the 12-day momentum study. Momentum readings improved as prices declined for a bullish divergence. Prices declined at a slower and slower pace, a sign that someone was buying on the way down. Prices opened at the deal price and have come off a bit, but if prices go back to the deal price or higher it may be a subtle technical hint that the offer could be sweetened. Note: I have no information or special knowledge.
Here is a chart of British American Tobacco, above, which has been in a sideways consolidation for around four months. The indicators are neutral to positive with a rising 200-day average line and a generally positive OBV line. One interesting point is the bearish divergence in early September -- as prices made a slight new high, the momentum reading was weaker than the July reading.
This Point and Figure chart, above, of RAI yields a possible price target of $86. I am not saying RAI is worth $86 or will somehow rally to $86, but this price target is derived by counting the columns across the recent consolidation, multiplying by 3 (to compensate for less data in the 1x3 chart), and then projecting it upward.