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The anticipation of earnings

Here’s what’s been happening, here’s what I’ve been looking at, and here’s how you can trade it…

When we last spoke, the S&P’s were stuck below the key level of resistance at 2900. Well, we got the catalyst we were looking for… bank earnings.

So why am I highlighting this, and why should you care?

Bank Earnings: JPM

The banks always kick off earnings season, and last quarter in particular, the earnings results from the majority of the key banks were explosive. It’s ALWAYS good for the stock market to start off earnings season with a bang — particularly when the indexes are within a stones throw of new, all-time highs.

JPMorgan Chase kicked off earnings season with a bang, moving twice the expected move overnight. Here at Simpler, we call this the ‘2x move,’ and it’s my favorite opportunity for a day trade.

JPM — Daily Chart

JPMorgan Chase is my favorite, out of the bank stocks. Now, it doesn’t mean that the rest of the banks will follow suit, but if you look at last quarters response to bank earnings — it was very positive, and I’ll look for that to continue.

The moral of the story here is that when banks are strong… the economy is strong. This gives me, and investors everywhere, more confidence in the upside of the stock market.

But, how do you trade it?

Typically, on a move like this, I like to place some day trades, as well as some swing trades. The swing trade will generally give you the best opportunity to take advantage of the continued momentum after earnings. You’ll hear me talking a lot more about the 2x move during this earnings season (so stay tuned!).

The best way to identify this is usually by using the news, custom scans, and market research criteria. I talk a lot about this in Simpler Foundation. You can find videos within Dear Simpler, the Learning Center, and Simpler Playbook on these topics.

If you’re interested, just follow this link.

Overall Market Analysis

Now, everything isn’t ‘exactly how I’d prefer’ — as I’d have much rather had a pullback in the indexes this week, directly before earnings season, so I could lay into my key names.

However, we didn’t get one. Now that doesn’t mean we won’t. I’m starting to see the market losing steam, and I’m looking for a pullback early next week. Or, should I say, crossing my fingers?

New Entries

My main focus here is identifying short-term, pullback buy entries for the ‘Run into Earnings.’ I like to trade options on high flying names, in the 7-15 day window before an earnings report. On the report, I also like to trade the report, in and of itself. After the fact, I love the momentum trades, as mentioned above.

For next week, I’m primarily looking for a pullback that would give me an ideal opportunity to enter positions on pullback buys in my hand-picked, stock picking lists. For instance, key technology, cloud, and cyber security names that I expect to climb higher into earnings, as well as explode on earnings.

Some of my favorites for this setup?

MSFT, AMZN, GOOGL, MA, ADBE, NOW, and TEAM. These stocks — the high flyers (think CYBR, PANW, XLNX) prove that despite issues with China, a slowing economy, there are many industries and stocks unaffected.

Those are the ones we want.

Beyond that, the market leaders — AMZN, MSFT, NFLX, FB, GOOGL — they also speak to the overall health of the bull market. I like them all long, but regardless of what happens, their reports WILL move the market. So, keep an eye out.

No matter what, I’m bullish this market (even on a 50-100 point S&P pullback).

Don’t forget that this price action is very strong, and we’re so close to new highs — that typically act as a magnet, but it doesn’t go straight up or straight down. Market internals and price action should be watched daily.

So, I’m keeping my positions bullish with a hedge, and focusing on hot names into earnings, on a short term time frame.

After Monday, I’ll give you another update and see where we’re at!

2 thoughts on “The anticipation of earnings”

  1. You concluded by stating you’re keeping your positions bullish with a hedge. Please discuss how you are hedging. With futures? With options? Which contracts? S&P, VIX? Timeframes? Very interested in this aspect. Sizing?

  2. Thanks for your update. I have a question regarding “Butterflies”. Since I own DIS stock, does it make sense to use 100 shares of it, instead of an option for the first leg @ 17 MAY 130, then sell 2 of the 140’s and buy 1 of the 150’s. This strategy would allow me to receive increased option revenue and would allow me to make money, if the stock price stayed (roughly) 128 and 142 . Since DIS reports earnings on May 8th, I can decide if I want to sell before earnings depending upon what the stock price is at that time , taking into account that the expected move is 9. Since I own the stock, I wouldn’t have any option decay with the 1st leg. Thanks in advance.

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