Price Action Thesis
We present our analysis of the price action on one of the leading insurance and asset managers, Prudential Financial, Inc. (NYSE: PRU) Inventory. Some investors might be surprised that we can also analyze a strong dividend stock like PRU through its price action target.
Therefore, we would like to point out that investors can use price action to value any security or asset class, with or without cash flow. Additionally, the price action is forward-looking, providing valuable insights and helping investors in their decision-making.
For PRU, we believe it is now at a critical juncture. It has lost its bullish bias that has supported its advance since its COVID 2020 low. Additionally, two bullish traps (significant rejection of buying momentum) in 2022 were instrumental in setting up the failure of its purchasing dynamic. As a result, the market digested the massive PRU gains from 2020.
Although Prudential’s 5.1% average dividend yield over 5 years (per S&P Cap IQ) is a source of attraction for investors, it has significantly underperformed the market over the past five to ten years ( based on total return CAGR). Therefore, investors should not be surprised that it was tagged with an average earnings multiple significantly lower than the market average.
We are rating PRU as a hold at this time. Even though it has lost its bullish bias, we think it is probably at a near-term bottom. But we don’t encourage investors to buy this dip until we see more constructive price action that can help mitigate its bearish bias.
PRU – Beware of Double Top Bull Traps
From the long-term chart of PRU, investors can glean that it does not exhibit a robust long-term uptrend. Instead, its long-term trend is emblematic of stocks that often exhibit earnings cyclicality in their underlying business model.
Although Prudential’s business model is resilient, its earnings growth has been relatively volatile over time. Therefore, we think the market likely factored in the volatility of its earnings growth when assessing appropriate valuations for PRU.
PRU’s long-term charts demonstrate a series of bullish and bearish traps (significant rejection of selling momentum). For example, bear traps suggest potential entry points for investors to build up with the market. On the other hand, bullish traps suggest that investors can use the signals to reduce their exposure before the market distributes further.
Bull traps often exhibit consistent price patterns, even if no two patterns are identical. Notably, rapid price structures preceded PRU bull traps in August 2015, February 2018, and most recently February 2022. These flush price structures indicate that the market quickly pulled in buyers before setting up those bull traps.
Looking at the weekly chart of PRU, we can more clearly correlate its medium-term trend. Readers can also collect the twin bull traps in February and April 2022. Notably, April’s price action was a powerful double-top price pattern, the strongest bull traps in our arsenal.
As a result, we weren’t surprised that the market sent PRU into a quick sell-off after April’s double top. Moreover, the selling pressure also prevented the resumption of its bullish bias.
Notably, the PRU has lost the bullish momentum that has supported its advance since its March 2020 bear trap (COVID bottom). Therefore, the loss of its bullish bias was an important move for the PRU and warrants caution.
Also, bear trap price structures are usually unreliable after double tops. Therefore, the initial downside trap seen in May was easily invalidated by selling pressure as the market continued to dispense PRU.
We believe that PRU has attempted to form a consolidation over the past four weeks. However, it is still too early to tell if it can mitigate its current bearish bias. Bottom signals are much less reliable without a reliable subsequent bear trap (after the failed buy momentum in May).
Nonetheless, a short-term rally could still follow as PRU technicals are well oversold. However, we do not encourage investors to buy this dip until more constructive price action signals are seen.
Is the PRU stock a buy, sell or hold?
We are rating PRU as a hold at this time.
The PRU lost its bullish bias as the market continued its distribution phase. Notably, a bear trap in May was invalidated, demonstrating the power of bearish market momentum.
Therefore, we need the PRU to stage a short-term rally (likely due to oversold techniques) before retesting its $90 short-term support. If a bear trap price structure moves from the retest, price action would be constructive for a sustained consolidation phase to regain bullish momentum.