As earnings season winds down traders are going to be looking for new reasons to be long the market. So far, according to Thompson's Reuters, 460 of the companies represented in the S&P 500 have reported earnings with almost 74% beating expectations. This is 10% above the long term average and helps explain why the market has been so strong, at least until last week when we saw some deterioration.
Take a look at the chart below to see how the S&P fell sharply late in the week. Importantly, it closed below all key technical levels, putting the bulls behind the 8 ball for the first time in nine months.
Generally, when a trend line is broken, there's a decent chance you will see lower prices. In the case of the S&P, it's quite possible the S&P could now test its 200 day moving average, currently at 2346, a level that if reached, could present traders with a high reward to risk opportunity.
Should the S&P work its way down to the 200 day, traders will want to look for those stocks that have held up the best during the correction. This should include companies that beat earnings expectations and could be attractive to traders. For example, take a look at the chart on Apple, a company that hit it out of the park when reporting earnings, has pulled back $5 off its high, remains above all key technical levels and is likely to be sought after highly should it pull back further if the S&P works its way lower.
In this case it might be worth looking at taking a position in the $152.50 to $156 range with an eye on picking up some points on any rebound while keeping a tight stop in case selling accelerates.
At EarningsBeats we scan for those companies that beat earnings expectations and consolidate them in our "Candidate Tracker" that is then made available to members. This allows them to watch for high reward to risk trading opportunities on pullbacks. If you would like to see a sample of the Candidate Tracker just click here.
There's no guarantee the market will keep falling but for sure the bears now have the technical advantage. So why not zero in on those companies that beat earnings expectations, have held up well on the pullback, and could be ripe for a nice bounce? Sounds like a plan to me.
John Hopkins
