Trading the volatility after earnings reports
Stock moves after companies beat or miss estimates provide opportunities for aggressive investors.
The volatility following an earnings report can provide trading opportunities using a strategy I call "buy and trade."
Quite often a stock will move up or down or both following an earnings beat, miss, or a shift in guidance. This volatility can provide an opportunity to adjust positions in the stock. I advocate using good-til-cancelled (GTC) limit orders to buy weakness to a value level, or to sell strength.
Below, I review the stocks of companies that reported results on Tuesday and Wednesday.
CSX (CSX) declined to $20.59 on Wednesday after warning that coal and agriculture shipments would be depressed by the effects of the U.S. drought and competition from cheap natural gas. The stock tested my monthly pivot at $20.78 giving aggressive traders the opportunity to add to positions. My semiannual value level remains at $17.35 with my semiannual risky level at $22.60.
Goldman Sachs (GS) beat both earnings-per-share and revenue estimates but with little price volatility after results were announced. The stock traded higher going into the report. This was a case where better-than-expected results were factored into the price action before the release. My monthly value level is $106.35, with a weekly risky level at $127.17.
IBM (IBM) missed analysts' expectations and gave a cautious outlook, citing weakness in Europe. The stock stayed below my monthly pivot at $208.88, which indicated risk to the 200-day simple moving average (SMA) at $197.83 and Wednesday's low was $198.55. The weekly chart shifts from positive to neutral on a close this week below its five-week modified moving average (MMA) at $203.41. Without a rebound the weekly chart will shift to negative next week. My semiannual value level is $178.43 with a monthly risky level at $208.88.
Intel (INTC) beat lowered earnings estimates, but issued a warning that sales of personal computers will remain weak this holiday season. The company cut its revenue estimates for the year-end quarter. The stock traded down to $21.27 on Wednesday closing in on my semiannual value level at $21.14. My monthly risky level is $25.07. The weekly chart is negative but oversold with the stock closing in on its 200-week SMA at $21.18.
Johnson & Johnson (JNJ) beat earnings estimates and the stock opened above my quarterly risky level, now a pivot at $68.76. My semiannual value level is $62.14, with monthly and quarterly pivots at $67.56 and $68.76, with annual risky levels at $70.65 and $75.79 where profits should be taken. The high, set in September 2008, is $72.76.
Coca Cola (KO) beat earnings-per-share estimates by a penny, but reported that earnings declined nearly 2% from the prior year. Earnings were hurt by the negative impact of currency fluctuations as a stronger dollar hurt overseas business. The stock opened higher on Wednesday to $38.14, but drifted to a day's low at $37.70, staying between my semiannual pivot at $36.63 and my monthly risky level at $41.86. The weekly chart shifts to negative on a close this week below the five-week MMA at $38.20.
UnitedHealth Group (UNH) beat consensus estimates, reporting higher revenue due to strong enrollment growth and share buy-backs. The stock opened with a high at $57.70 on Wednesday then drifted to a day's low at $55.65. My semiannual value level is $55.05 with my monthly risky level at $59.61.
PepsiCo (PEP) was adversely affected by currency issues as EPS declined 8% year over year, but EPS was a beat nonetheless. The company also affirmed its 2012 outlook. The stock opened with a day's high at $70.93 then drifted down to a day's low at $69.95. The stock remains between my quarterly value level at $68.44 and my monthly risky level at $72.22. The weekly chart stayed negative with a weekly close below the five-week MMA at $70.80.
In Thursday's trading, traders should buy weakness to my annual pivot at $57.53 or sell strength to my quarterly risky level at $60.57. The weekly chart profile stays positive on a close this week above the five-week MMA at $58.15.
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