ChartWatchers

Are Strong AD Lines Suggesting Big Earnings Ahead for These 3 Companies?

 | 

Earnings season kicks off next week, with the big banks getting things started. After a rough stretch with falling treasury yields, the banks index ($DJUSBK) rallied on Friday as yields rebounded. Recently, I provided a relative strength look at key banks reporting next week. Here's a quick recap if you missed my earlier discussion:

Relative strength definitely favors Wells Fargo (WFC), as it's the farthest to the right. While it's in the weakening quadrant, that's not unusual for a leader to consolidate on a relative basis and work through the weakening quadrant before turning back up into leading. I prefer stocks that move mostly on the right side of an RRG chart.

In addition to showing relative strength, the accumulation/distribution line (AD line) remains quite strong on all 3 banks on the right side - WFC, PNC, and BAC. Let's look at the WFC SharpChart:

WFC continues to trade well, despite the challenges that a falling treasury yield environment presents. It remains a leader as it recently broke out again vs. its bank peers. Its AD line remains as strong as any of the banks shown above.

Wall Street seems to be "banking" on a solid report from Wells Fargo, and I'm a believer as well.

Does The AD Line Matter?

I've seen plenty of stocks rise without a strong AD line, so I don't believe a strong AD line is necessary. However, from a common sense perspective, the AD line goes higher any time a stock closes above its daily midpoint range, even if it closes lower than the prior day's close. That's the key difference between the AD line and OBV (On Balance Volume). If a stock closes above its midpoint for the day, in theory there were more buyers than sellers. If this continues over time, a rising AD line should reflect whether a stock is being bought or sold on a net basis. So while it may not be necessary, it is a positive and potentially confirming signal.

With this in mind, I ran a scan of stocks with RSIs below 50 (recent pullback) and AD lines that have been rising across 4 time frames. Below are 3 companies that are setting new AD line highs, despite price action that's been moving lower. This certainly could be a signal that Wall Street is using this weakness to accumulate before earnings.

IMAX Corp. (IMAX)

IMAX hit a high during the first week of March and hasn't returned to that price level. IMAX was a major beneficiary of the positive vaccine news that was reported on Monday, November 9th last year and the ensuing advance was solid - more than a double in just 4 weeks. During its recent consolidation since that March high, IMAX has seen its AD line push to new highs and continuously trend higher:

I'd want to see gap support at 18.64 hold. Otherwise, I'd want to re-evaluate this trade. Recreational services ($DJUSRQ) have been very weak on a relative basis, but are currently testing key price support on an absolute basis, where we could see a short-term rally. Despite the significant weakness in IMAX shares the past couple weeks, the AD line remains in a very solid uptrend, suggesting possible accumulation. We'll know shortly whether this AD line was a bullish signal.

IMAX reports earnings on July 27th after the market closes.

Ferrari NV (RACE)

It's been even longer since RACE saw its high - all the way back on December 29th, 2020. It's still roughly 10% off that high, yet its AD line has broken to a new high, which is rather impressive:

We saw a gap higher on Friday to clear both of its key moving averages, so perhaps RACE is ready to begin trending higher and towards the two key price resistance levels that I've annotated above. There are definitely other technical indicators that contradict the strong AD line, namely relative weakness and lack of a defined uptrend. But is the AD line providing us an early signal of an impending advance? We'll find out soon.

RACE reports earnings on August 2nd before the market opens.

Yeti Holdings (YETI)

I feel most comfortable about this one. YETI has been an excellent relative performer and its group, recreational products ($DJUSRP), has been stronger than both recreational services and automobiles in 2021. We've seen a bit of absolute price weakness over the past month, but YETI's AD line has powered to new highs:

Unlike the other two stocks that I've provided above, I see few flaws in this chart. Furthermore, I believe consumer discretionary is poised to lead the market higher in the second half of the year. Given the tailwinds of a secular bull market, the strength of the recreational products group and the technical strength of YETI, I believe the new high on the AD line as simply a confirming bullish signal of higher prices ahead.

On Saturday morning, July 10th, at 10:00am ET, I'm hosting a FREE webinar, "Sneak Preview - Q2 Earnings". I'll focus on another 10 or 15 stocks with solid AD lines as they head towards earnings. I'll also cover all major companies that report earnings next week and give my opinion as to whether I expect each company to beat or miss earnings. So if you like the above analysis, then you should enjoy Saturday's webinar. These FREE events are reserved for our EarningsBeats.com community members, which includes our free EB Digest newsletter. If you attend the webinar directly from the link below, we'll be sure to add you to this free newsletter, published 3x a week on Mondays, Wednesdays and Fridays. There is no credit card required and you may unsubscribe at any time.

Click here for the link for Saturday's webinar (the room will be open by 9:00am ET, but the webinar will not begin until 10:00am ET). If you'd like to directly subscribe for our EB Digest newsletter, you can CLICK HERE to enter your name and email address in the area provided.


Happy trading!

Tom

Tom Bowley
About the author: is the Chief Market Strategist of EarningsBeats.com, a company providing a research and educational platform for both investment professionals and individual investors. Tom writes a comprehensive Daily Market Report (DMR), providing guidance to EB.com members every day that the stock market is open. Tom has contributed technical expertise here at StockCharts.com since 2006 and has a fundamental background in public accounting as well, blending a unique skill set to approach the U.S. stock market. Learn More
Subscribe to ChartWatchers to be notified whenever a new post is added to this blog!
comments powered by Disqus