The Bearish Nasdaq Head & Shoulders Pattern
We made it through FAANG earnings relatively unscathed. However, most often, a big move comes post-tech earnings. That move is likely coming this week into next week. Based on the bearish patterns all over the place, the path of least resistance remains to the downside.
But just because we made it through big tech doesn’t mean earnings season is behind us!
Most of the tickers on the docket this week are volatile in a different way than they were last week. While last week, we were faced with market-moving mega-cap stocks, this week, we have all kinds of former IPO darlings reporting that have already gotten crushed. This includes the likes of UBER, AFRM, APPS, FROG, HOOD, SONO, BARK, DOCS, and LYFT. These stocks have significantly less volume but are highly traded by retail traders and often experience large percentage moves. For these reasons, they can make for suitable trading if you aren’t afraid of risk-taking and volatility!
I’m only interested in these trashy names if they have high short interest and are near recent highs. It’s certainly not because they are good companies. I doubt any of these reclaim their former glory days. But I’m always on the lookout for potential trading setups!
The Earnings-Induced Short Squeeze
Doximity (DOCS) is one such stock that reports on Thursday, February 9th, after-market close. It has about 14% high short interest, gapped up 17% last quarter post-earnings, and is within range of breaking July/August highs on the report. DOCS has about a $5 expected market maker move upon the report, approximately 13%. A 13% move is actually on the lower end of what this stock has seen post-earnings.
Check out the chart below:
Options Trade Ideas
When a short squeeze is possible, trade potential includes the risky move of buying in before earnings or the more conservative method of waiting until after the report and jumping on a potential short squeeze at that time.
The benefit of getting in before is that you’d be in the play if a big, overnight move occurs. Of course, if it doesn’t end up squeezing, you have a high-risk trade that will incur a loss.
That’s why with earnings-induced short squeezes, generally, I like to wait until after the report and jump on the ride if it occurs. That way, I can wait and see if the squeeze takes off. Getting in afterward does mean you miss some (or all) of the move, but it’s less risky.
Sometimes you can even catch a short squeeze pre-earnings as traders try to get out of stock likely to squeeze on the report.
Take your pick!
Another stock on my radar is coming up on Tuesday after the market closes. This company was one of the top-performing stocks for most of last year.
A Relative Strength Solar Stock – Enphase Energy (ENPH)
Enphase is my favorite solar stock for a few reasons. The way it trades is relatively consistent post-earnings. As you can see from the screenshot below, ENPH has gapped up the past five quarters in a row, experiencing moves between 8-23% higher post-earnings. It’s reporting after market close on Tuesday, February 7th.
What is great about ENPH is that the moves are based on solid fundamentals. While even companies like Microsoft and Amazon are struggling in the current economic climate and have missed EPS estimates, Enphase has crushed them consistently.
It seems crazy to think that a solar company could do that in this environment, primarily because their systems are so expensive! However, a lot is going on on the macro scene as well. For example, last year, there were incredibly high energy costs and many storms that caused people to lose trust in power grids. In addition to a push toward solar and renewable energy, that has continued increasing profits for Enphase.
From a technical perspective, Enphase has a $28.25 expected market maker move. A move to the downside would bring it back to support levels from last July. A move higher by this amount would bring it up into resistance at the $250 price point and 200 SMA. The market makers are pricing in a 13% move, and the implied volatility is at a scorching 165%.
Options Trade Ideas
Based on these stats, potential options include selling premium using a trade like an iron condor, or picking a direction and selling a credit spread. On ENPH specifically, looking for volatility crush post-earnings is in play.
Do you have any trade ideas for earnings this week?
Let me know!
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