A Bullish Stock in a Bear Market
Despite the rally we have seen the past several weeks, the underlying cracks in the market remain, many of which have become even more apparent on earnings. However, that hasn’t been the case for all companies. In fact, many companies within the energy and consumer staples spaces have maintained strength not just in their technical patterns but also in their fundamentals as well. It’s these companies that are not just surviving, but continuing to thrive despite ongoing weakening macroeconomic circumstances. It’s these companies that may produce softening results but are strong at their core.
It’s also these companies that tend to rally post-earnings, as the market takes in positive news with a giant sigh of relief. Take a look at how Palo Alto (PANW) traded on Monday, post-earnings. It gapped up 10%, which is about $54 (when the expected, market maker move was $38). A strong beat in a bear market equaled a greater than expected move on earnings, plus a nice gap higher up above resistance for the stock. The company did also note a stock split coming soon in September, which didn’t hurt either!
Check out PANW in the Hot Zone below:
As such, I continue to look for companies that fit this mold. There is one reporting on the 25th with this pattern, and that company is ULTA Beauty (ULTA).
Check out the chart of ULTA in the Hot Zone below:
ULTA on 8.24.22
Take a look at the Earnings Hot Zone stats. Over the course of the past 4 reports, ULTA stock has gapped up each time, and last quarter it gapped up more than 10%, almost trading to a new, all-time high. This was after selling off for weeks as the market as a whole tanked and made new lows on the year. They managed to pull-off impressive numbers even last quarter, as the rest of the market was continuing to soften. That in and of itself is a major sign of strength. It’s one thing to gap up 10% in a strong, bull market, but to make that kind of move last quarter when everything was falling apart, is another signal entirely.
Do Past Results = Future Success?
Of course, one could argue that this quarter, inflation has gotten even higher, consumer sentiment has worsened, consumers have changed priorities, etc. These reasons can and should be listed as reasons why the stock may not be as strong post-earnings this quarter as it was last quarter. All of these factors are true, but I still argue that ULTA has already proven it’s worth as a strong company throughout these times.
So, even if it does happen to be weak this quarter, and say, pullback into support at ~$400 a share, I’d still take that as a sign that this is a solid, technical chart backed by strong fundamentals. In fact, I’d even take a pullback into the $350 price point before I’d reconsider my long stance.
ULTA has a market maker expected move of ~$25 on earnings, and I have an overall price target of about $450-460 on the stock. It’s a bit extended going into the report, after a nice bounce off of key support, so I always hate to make any bets that are too bullish in nature after a good rally. But, I can’t help noticing the very nice weekly squeeze that has been consolidating since March of 2021. I can’t say that I have ever seen a squeeze consolidate for this length of time!
Check out the weekly chart of ULTA below:
What does that mean?
It means that even though ULTA has continued to trade higher over this time frame, it’s also been building up energy. This consolidation is at some point going to breakout. Generally, when that breakout happens, it happens in the direction of the trend – which is up! So, that means that even if ULTA can’t get it together directly after earnings, and pulls back, that may just be a great entry spot for the longer term move higher.
Afterall, even though we are in a bear market, there are still upside opportunities, and I think ULTA Is one of those.
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