Caution, Earnings Ahead

07/19/2011 11:14 am EST


Thomas Aspray

, Professional Trader & Analyst

Taking a position ahead of earnings, even if they are better than expected, can be high risk, but assessing the technical outlook for Nasdaq 100 stocks like Apple (AAPL), SanDisk (SNDK), eBay (EBAY), and Yahoo (YHOO) can provide a valuable edge.

Monday was a rough day for the stock market, as the S&P 500 again dropped below the 1300 level and tested the 61.8% support before rebounding into the close. The short-term Advance/Decline (A/D) indicators like the McClellan Oscillator are back to oversold levels last seen at the June lows.

Because the S&P 500 has a large number of financial stocks, it was hit harder than the other major averages. The Dow Industrials and Nasdaq 100 are both still holding above their 50% support levels.

This is a big week for earnings, and in yesterday’s column, I featured a list of the Nasdaq 100’s 20 most overbought stocks. The relationship of a stock’s price to its weekly Starc bands can help you decide what action, if any, is appropriate just before or after earnings are released.

One of the most overbought stocks was Apple, Inc. (AAPL), which added another 2.4% on Monday to close at $373.80, above the weekly Starc+ band at $371.07. Apple will report earnings after the close today (July 19).

I had been concerned earlier in the month that the stock might be losing its leadership role, but the new weekly closing high has erased those concerns.

The forecasts for Apple’s earnings are widely optimistic, and the bullish consensus makes me a bit nervous because no matter how good the earnings are, it seems like someone will always end up being disappointed.

I was also surprised to learn that one major firm recommended buying call options ahead of Apple’s earnings. Though they may be right this time, buying calls when a stock is above its weekly Starc+ band generally does not work out well.

eBay Inc. (EBAY), Yahoo Inc. (YHOO), and SanDisk Corp. (SNDK) are also reporting earnings this week, and even they are not on the most overbought list, the Starc bands and volume analysis may help us become better prepared for the market’s reaction to these upcoming earnings.

NEXT: Latest Chart Action for Apple and SanDisk


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Chart Analysis: Apple, Inc. (AAPL) broke out of its trading range with the close above $352, line a. The width of the trading range was $42, so the potential long-term upside targets are in the $390-$394 area.

  • There is initial support now at $356-$362 with stronger support at $348-$352
  • The relative performance, or RS analysis, had been moving sideways for the past several months, but broke through resistance (line b) last week
  • The ability of the RS to hold above the April lows was positive, and the weekly uptrend, line c, is intact
  • Weekly on-balance volume (OBV) failed to make new highs in 2011, line d, and then violated support ( line e) in mid-April, confirming the negative divergence
  • The OBV has moved back above its weighted moving average (WMA) but it is well below its previous highs. This is not a pattern that you would typically see in a stock that was expected to gain another 20%-30%

SanDisk Corp. (SNDK) will release earnings on Thursday, July 21. The stock closed a bit lower on Monday at $40.50. It is just below the mid-range of the weekly Starc bands, with the Starc+ at $48.30 and Starc- at $34.97.

  • The daily downtrend (line f) and the daily Starc+ band are in the $44.10-$44.20 area with the 2011 highs at $53.60
  • The daily RS line has been in a well-established downtrend (line h) all year
  • The RS violated support, line i, in June, signaling that it was going to be weaker than the S&P 500
  • The daily OBV has been holding up better than prices, suggesting that the selling has not been too heavy on the decline
  • The daily chart has support at $39.12 (line g), which is just above the daily Starc- band at $38.59

NEXT: Important Pre-Earnings Action for eBay and Yahoo


Click to Enlarge

eBay Inc. (EBAY) has earnings due out on Wednesday (July 20) and the weekly chart shows a broad trading range, lines a and b, that has been in effect since last November.

  • EBAY closed Monday at $32.70. Last week’s high was $34.07 and the weekly Starc+ band is at $34.97
  • The weekly OBV broke support, line d, in June, while prices did not. The OBV is well below its declining weighted moving average, which is negative
  • First good support on the weekly chart is in the $29.80-$30.20 area with the last swing low at $28.27. The weekly Starc- band is at $27.07

Yahoo Inc. (YHOO) has had a recent pattern of disappointing earnings, so the numbers after the close on Tuesday will be widely watched. Even though the earnings expectations were low, the stock has dropped 9.5% since peaking on July 7 at $15.95.

  • The weekly Starc- band and strong weekly chart support, line f, are in the $13.05 area. Once below this level, the next support is at $10.80-$11.75
  • The weekly OBV has been below its weighted moving average for the past nine weeks, but it was strong at the early-May highs
  • There is first resistance now at $15.95 and then at $16.90 with the weekly Starc+ band at $17.10. The Starc+ band was tested in May before YHOO reversed to the downside

What It Means: Clearly, this week is a big one for earnings, and given the recent selling in the stock market, weaker-than-expected earnings could add even more selling pressure. Unless you are in a strongly trending bull market, taking positions ahead of an earnings report is a bad idea, in my opinion, as the risk/reward is not favorable.

How to Profit: As for these individual stocks, I would not get caught up in the earnings euphoria over Apple, Inc. (AAPL), be it expected or actual earnings. Those who are long and nervous could hedge their positions on a further sharp rally, as option premiums are likely to reach unsustainable levels.

SanDisk Corp. (SNDK) looks technically weak and vulnerable to a disappointing earnings report.

eBay Inc. (EBAY) is trading close enough to its weekly Starc+ band to make it vulnerable at current levels. Given its weak volume pattern, the stock could easily drop 3%-5%.

Yahoo Inc. (YHOO) has been acting weaker than the market, so it will take a very strong earnings report to turn it around. Look for a drop to the $13.05 -$13.35 area.

Microsoft (MSFT) also reports on Thursday, and with the stock trading near trend line and Starc band resistance, it looks ready for a pullback. For more on MSFT, see 4 Most Overbought Dow Stocks.

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