Trading Places with Tom Bowley

This Approach Is The Absolute Best Approach To Earnings Season

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While our primary focus at EarningsBeats.com is technical analysis, we combine that technical approach with fundamental analysis as well. Earnings is what we do. Prior to earnings reports, we're scouting for those companies most likely to report better-than-expected earnings and also the opposite - companies we want to avoid heading into earnings. Relative strength holds the key in both cases. Wall Street meets with management teams until their respective quarter end. Based on what they see and what they hear, they reposition themselves into stocks with strong stories and out of stocks that are likely to disappoint. Since we don't have the luxury of sitting down with management teams, our approach must focus on "hearing the story" from the charts rather than the management teams - and that's exactly what we do.

Over the past few quarters, we've developed an "Upcoming Earnings Relative Strength ChartList". In this ChartList, we organize companies that (1) will be reporting in the week ahead, (2) have market capitalizations over $1 billion, and (3) trade at least 200,000 shares a day over the past quarter to ensure liquidity. The truly unique part of this ChartList is that every chart is in relative strength form. For instance, last week Unitedhealth Group (UNH) reported its earnings and they were fantastic. UNH beat consensus estimates on both its top line (revenues) and bottom line (EPS). On one of my Trading Places LIVE shows last week, I had pointed out the good, the ok, and the ugly among upcoming earnings reports. UNH was the "good". Any time a stock is leading its industry group higher and its industry group is one of the strongest vs. the S&P 500, that's a great combination and one in which I expect to see great quarterly results. UNH did not disappoint. Let's look at UNH on a relative strength basis as it headed into earnings last week:

The price chart is a relative price chart of the UNH vs. its peer group - health care providers ($DJUSHP). By typing in the symbol "UNH:$DJUSHP", the price chart shows us how UNH is trading relative to its peers. I think it's rather obvious that it's in an uptrend. The PPO measures momentum, but since this a relative chart, it's actually measuring the relative momentum of UNH vs. its peers. Again, we're looking at an exceptionally strong chart.

UNH posted superb numbers. Here's a quick look at their numbers vs. Wall Street consensus estimates:

  • Revenues: $80.15 billion (actual) vs. $78.76 billion (estimate)
  • EPS: $5.49 (actual) vs. $5.37 (estimate)

UNH did exactly what I'd expect - report better-than-expected numbers. The next question is, "how did Wall Street react to this great news?" Initially, it gapped higher, moved to an all-time high intraday, then sold off into the close. UNH experienced the "buy on rumor, sell on news." Let me be clear that just because UNH showed great relative strength and reported excellent results, that does not mean we'll see a huge advance. Remember, Wall Street was buying ON THE WAY UP and PRIOR to the quarterly results. Let the short-term selling be your friend and help you to enter at a better price. This requires a bit of patience. Look at the absolute chart on UNH:

I like entry on the 20-day EMA test (green arrow). There's fairly solid short-term price support in the 510-520 area, so I'd expect to see buyers in that zone. I see good things ahead for UNH, especially given UNH's historical affinity for the month of May. It's risen every year over the past decade, check it out:

On Monday, April 18th, I'll feature an upcoming earnings report in our FREE EB Digest newsletter. It's an industry-leading company, just like UNH. But that's not all. For all of our EB Digest subscribers, I'll share our Upcoming Earnings Relative Strength ChartList where you can compare the relative strength of every company reporting next week (that met our criteria listed earlier). Our EB Digest is completely free and there is no credit card required. And then I'll host a FREE "Q1 Earnings: Sneak Preview" webinar on Monday, April 18th at 4:30pm ET. I'll describe how I use this ChartList to prepare for and uncover great trades. If you'd like to see the featured chart on Monday and register for Monday's webinar, simply CLICK HERE and enter your name and email address! I hope to see you on Monday!

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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