Trading Places with Tom Bowley

Predicting Earnings Reports Is As Simple As Analyzing One Key Indicator

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Let me start off by saying that nothing is a guarantee. In technical analysis, we don't work in guarantees. We work in probabilities. As I approach earnings season, I like to separate companies into 3 baskets:

  1. The strong
  2. The weak
  3. The I don't care

In my experience, the best earnings generally come from the best companies in the best industries in the best sectors. There's a reason why companies are outperforming heading into their earnings reports and, on their earnings dates, we find out why. The opposite is true as well. Weak stocks are typically weak for a reason. Case in point: Netflix (NFLX). Last week, in our "Sneak Preview: Q1 Earnings" event, NFLX was featured as one of the weak upcoming reports. One look at the NFLX chart should help to explain why:

NFLX showed absolutely ZERO relative strength as it approached yet another dismal earnings report. You have to keep in mind that Wall Street firms meet with NFLX management throughout the quarter (until quarter end). They are already receiving information as to competitive strength/weakness and they form their own conclusions as to the reliability of revenue and EPS estimates. These firms then return to their offices and they either buy or sell NFLX based on their discussions. We don't have that luxury. If I call the NFLX accounting folks, I don't think they're going to pick up. The only way I can make an assessment as to what might be forthcoming with regard to earnings is to look at the chart. It's important to look at absolute price action, but I believe relative price action may be even more important.

Now let's look at the relative strength of another company, Nucor Corp (NUE):

Last week, this was one of the "strong" charts that I passed along in our Sneak Preview event. I expected very solid numbers and NUE delivered. Their revenues surpassed estimates, as did their EPS. They also indicated that Q2 would likely be the most profitable quarter in the company's history! Did Wall Street just make a lucky guess? I don't think so. NUE moved higher in anticipation of strong earnings, then jumped another 10% intraday after earnings were reported. NUE has seen a bit of profit taking the past three trading sessions as the overall market has sold off hard.

As we move full throttle into earnings season, a TON of companies will be reporting. So Wednesday afternoon at 4:30pm, I'll be unveiling a new batch of "strong" and "weak" stocks as they head into their earnings. While I plan to discuss the results of last week's event (ie, how did the strong and weak stocks perform collectively?), I will share this with you. The 7 primary strong stocks provided averaged gapping higher by 4.46% after earnings were reported, while the 9 primary weak stocks provided averaged gapping lower by 3.28%. That's an 8 percentage point swing between the two groups.

If you'd like to join us at EarningsBeats.com for our Q1 Earnings webinar, I'll provide the next batch of strong and weak stocks after reviewing more than 1500 charts featuring companies with upcoming earnings reports. This is a members-only event, but a 30-day FREE trial gets you a seat to the event. CLICK HERE for more information and to start your trial! We'll send out room instructions tomorrow.

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
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