An Opportunity to Buy Diageo

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There are some shares that are solid in both bull and bear markets, one example is beverages company Diageo (DGE). In bull markets the stock tends to move up with the FTSE 100 index. In bear markets the stock outperforms the index, it has a strong relative strength. As the risk of a global recession rises, Diageo is seen as a defensive stock. With its beta of zero, the shares do not always go down when the FTSE goes down. In a recession Diageo is likely to perform well, alcohol is a bit like tobacco, in a recession people continue to drink.

On the chart we note the nice uptrend that has been in progress for months, the stock has strong momentum. Each time the price declines to the 200 day moving average, a rally follows. Right now the price is approaching the 200-day moving average (blue trendline):

 

The current decline started when US bond yields surged from their recent lows at the beginning of September. I believe this decline is not the final decline. I believe the stock will rebound to the 3400 area in the short term, then it will decline below the 200-day moving average, in a three-wave pattern as you would expect in an Elliott wave. A potential support is near 3080.  The correction will coincide with the end of the counter rend rally in US bond yields. Another rally in Diageo is expected. This correction is healthy because the shares trade on a forward PE of 26. Not cheap, but the dividend yield is decent at 2%. Another 5-6% decline and Diageo will be a buy.

Thierry Laduguie is Trading Strategist at www.ftse100trading.uk

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