If a company is likely to report strong results, Wall Street knows it. Analysts have met with management and discussed targets, competition, product strategies, margins, etc. If they like what they hear, they return to their offices and buy for themselves and clients. That's how it works. Astute technicians see the bullish price action and relative price action and make informed trading decisions.
Is following price action a foolproof method in uncovering great trades? Of course not. There are a few factors in play here that we must consider. First and foremost, management isn't always totally honest and forthcoming. Secondly, management could have the right intentions, fully believing that what they're saying is completely true, yet they still fall short of expectations. Thirdly, there's a "quiet period" from the end of a company's quarter until it releases its results where business conditions can change or competitors can make announcements that impact the company.
Technicians understand that the price charts include all known information. That's the beauty of it. When you look at a chart and say, "but what if the company....?", it makes little sense. Why? Because the market has already considered it. The stock market is generally very good at assessing company value from a big picture perspective. But it's the short-term inefficiencies caused mostly by our market maker system that interests me. If you're a long-term investor, look at weekly or monthly charts, which help to mask all of that short-term "noise". However, if you're a shorter-term momentum trader like me, well, welcome to the party!
So....how can we use technical analysis to our advantage when it comes to earnings? Well, first understand the human components and the limitations that I discussed earlier. They will test your psyche throughout earnings season. But I believe the ability to more accurately predict earnings is a 2 step process:
- Understand the relative strength or weakness of the company's industry group
- Understand the relative strength or weakness of the company vs. its industry peers
If you have a strong relative performer within a strong industry group, your chances of seeing a blowout earnings report increase dramatically in my opinion. I will provide you two stocks to illustrate this, one on each side of the relative strength spectrum.
Here's my guarantee to you. The first bullish stock that I provide below will beat its revenue and EPS estimates when they report. The second bearish stock will miss both its revenue and EPS estimates. If I'm wrong on either of these predictions, I'll send you my Strong Earnings ChartList, which comprises roughly 280 companies that have beaten both revenue and EPS consensus estimates in their latest quarterly earnings reports completely free of charge. The charts are annotated and currently only available to EarningsBeats.com members. But if I'm wrong on either of the two predictions, write to me at "tom@earningsbeats.com", simply say "Earnings Guarantee" in the subject line and I'll provide you this ChartList.
Prediction #1 - AAPL will blow away estimates
I can't script a better looking chart than this. I'll be shocked if AAPL reports anything other than an absolutely stunning earnings report. The company has added 50% to its market cap since breaking out above 215 in September. When I look at a chart like this, I simply see MASSIVE Wall Street accumulation. Now let me throw a word of caution in here. We could see a "buy the rumor, sell the news" scenario. While I fully expect AAPL to crush estimates, that doesn't always translate into further gains. That's another risk of holding a stock into earnings. Even the best of reports can be met with short-term selling.
Prediction #2 - MMM will miss its estimates
MMM has been rallying since its October low, but I'm surely not convinced the worst is over for the company. The drop throughout 2019 occurred on very heavy volume as the masses were exiting. While the short-term rally has been nice, MMM really only showed relative strength for a brief time in December. Otherwise, much of the rally has simply been as a result of "a rising tide lifts all boats" scenario. I see an earnings miss coming.
I'll share my earnings opinion on dozens of companies during my Q4 Earnings webinar on Monday after the closing bell at 4:30pm EST. It's an EarningsBeats.com members-only event, but we've left open our zero cost 30-day trial through Monday. I'd love for you to join me!
Happy trading!
Tom
