IBM Presents - You Make the Call

It's earnings season.. do you look at a chart and then place a trade?

Any old fan of Monday Night Football remembers IBM presents “You Make The Call”. I swear I know more about the rules of football as a result of these commercials. In fact, I remember these ads better than the games themselves. Classics..

***WARNING** Clicking this video is addictive and will lead to a huge waste of time

So what does this have to do with stocks and earnings season? It’s easy, I’ll explain.

Yesterday we got earnings in Netflix after the bell. Were you crazy enough to take a position in this stock ahead of the news? Did you look at a chart of $NFLX and actually make a decision based on price? No technician in their right mind would have. Let’s go to the video tape - well, chart…

The stock peaked in late July at $575, sold off to $467 later that month. It’s been trading in a large neutral channel ever since. It’s got a strong support level around $460/$470 as well as a rising 200 day moving average at just over $475. So there’s my downside area of interest and risk threshold.

Going into yesterday’s earnings release the stock had rallied to the middle of it’s recent and even narrower range. It finished the session sitting on it’s 50 day moving average just over $500.

Is it a screaming buy, sell or no trade based on these factors? If I was asked to make the call, I’d say it’s a coin flip. It’s a clear no trade until I get more price information. Well, it rallied after hours so I can now set my price targets and maybe chase. If I do, I’ll be sure to have my stops trailing tightly behind.

If you bought or sold ahead of the news - it was a huge gamble because the risk/reward from a technical perspective was not ideal. So buying would’ve been the right call in hindsight, but not based on anything other than good fortune.

Let’s look at another stock react to earnings - Goldman Sachs. No technician in their right mind saw this chart and said I want to get long into earnings.

When they released their earnings ahead of yesterday’s opening we learned they crushed estimates. Any average Joe listening to the news would’ve expected to the stock to rally. Well thankfully you readers are far from average Joe’s and understand that maybe, just maybe, the rally had been priced in.

The stock opened higher and then quickly filled that opening gap and began to sell off. It closed lower by 2.26%. It was the stock’s worst one day performance since summer. So if you made the call to buy just based on the earnings news, you made the wrong call.

The right call was to buy the stock back in November when it broke out of it’s large base. The price was dictating good things were happening and it went on to record new highs after the breakout. By time the news came out it was already priced into the stock.

The good news is that the stock remains in a strong uptrend and a trader may look to buy a pullback knowing their levels of risk based on the technicals.

Lastly, I’d be remiss if we didn't play our own game based on the classic Monday Night Football ad. Tomorrow after the close Alcoa ($AA) releases it’s earnings. Let’s look at the chart and - You Make The Call…

The stock has had a nice run up after a strong breakout in November. Like $GS, buying the breakout was the play. It rallied and then flagged nicely. We had another breakout, but it failed. OOPS. The near term and longer term trends remain up, but there’s potential trouble lurking if we don’t hold current levels.

In this case, the earnings news will likely be the catalyst to make the next move. We need to be ready for that price action to act. Once we know the measured risk and direction, we can trade accordingly.

That’s how I see it. I won’t gamble into the earnings news. What do you do? Will it be a tough day for Alcoa or is it about to have a Fantastic Finish!