The Flavor of the Season
Microsoft reported earnings this week, and despite an EPS beat, the stock gapped down -$9.54. If you know me, you know I’m very bullish on Microsoft stock. But, after Tesla and Netflix earnings last week, the flavor of the season became much more clear.
What is the flavor of the season? It’s the energy and emotion in the air surrounding earnings. It’s almost like culture but more of a fad. It’s the commentary and the reactions tainted by groupthink that catch on like wildfire.
It’s not constant like culture but changes with the season. What was impressive to investors last quarter may fall flat this quarter due to how the flavor changes.
Sometimes, you’ll see that groupthink is overwhelmingly positive. Analysts pick out the positive bullet points and harp on those. Sometimes, like this quarter, those few negatives catch flame and spread. It takes a real surprise and true bullish excitement to keep a stock moving after the rallies we have already seen.
How can you tell what the flavor of the season is? And when?
You can never really know the season’s flavor until you get into the third week. That is after you get through bank earnings, and usually the first of the tech stocks: Tesla, Netflix, and Taiwan Semi.
How the market reacts to these earnings reports tells you what the flavor is.
Pre-earnings analysis is a big piece of my work. People may think that the analysis becomes invalid once the report comes out. But my friends, it does not.
While it can be used to trade the actual event, oftentimes, there is more opportunity post-earnings. Once the earnings event is over, the IV crush comes through, but now we can focus on the underlying technicals and fundamentals, paired with whatever post-earnings setup we have.
Check out this video I made on Microsoft Pre-Earnings. I covered:
- My long-term view
- Earnings analysis over 12 quarters
- Daily Squeeze Pro Setup
- Key support and resistance zones
You’ll notice that at the end of the video, I talk about the fact that MSFT may fall even with an EPS beat, and I note the lower levels of support at $335. I also point out how if that does happen, it’s not the worst thing! In fact, that would set up a post-earnings trading setup, which is what we have right here and now.
Microsoft – Post-Earnings Setup
Check out the image above of Microsoft on the daily chart. It’s pulled back directly into the 50 SMA, which is also combined with Fibonacci support. We have a daily squeeze, and overhead Fibonacci targets. I also have Hot Zone stats demonstrating that Microsoft historically trades higher in the 8 trading days post-earnings.
The only thing I don’t like about this is that the TurboVZO, the measure of volume flow, is shifting lower. Ideally, you’d want to see that breaking out above the yellow zone as bullish volume flows in. So, it’s a bit of a heads-up that this setup may fail if the volume keeps going lower (i.e., stays red and breaks below the yellow zone).
While I love my bullish trading setups, it’s important to know the point at which they are invalid if they go wrong. Generally, that is below the support zone you use for a buy level.
Therefore, with a support zone at $335 and a lower zone at $329.84, on a break of $329 is where I’d consider myself wrong on this post-earnings buying idea in Microsoft.
Are you trading Microsoft? Did you trade it for earnings?
I used a neutral iron condor and was able to flip it out for about a 15% overnight profit. Generally, I target about 30% so it was a little low but I’ll take it. I also had a more aggressive, bullish butterfly that doesn’t look like it’s going to work just yet. I haven’t taken an entry yet on this post-earnings move because I haven’t gotten my buy triggers, but I’m watching this zone. I like to see at least the 30-minute chart shifting higher, with buyers coming in for a bullish entry against a zone. Otherwise, no trigger, no trade!