Big Earnings Season Coming Up (again!)

One thing I love about the beginning of the year is another round of earnings season, the time where companies show what ‘they got’ and we see big price jumps up and down (generally speaking).   As an option trader this presents tremendous opportunities for gains whether playing in front of earnings or afterward.  I will often use different option trading strategies such as strangles, straddles or credit spreads to increase my odds of success.  Using the technical indicators combined with money flows, momentum and sentiment could put you on a plane of quick and powerful profits.  But like anything, scrutinizing and being particular are best served.

This past week saw earnings out from names such as Alcoa, Wells Fargo and Monsanto.  With low market volatility the expectation is not for big moves, but we can see results stand on their own rather than being pushed around by market sentiment.  Two of these moved modestly on ‘expected’ earnings (AA and WFC) while the other broke out of a range on nice volume expansion (MON).  Prior to earnings Monsanto was good into the report now it looks even better for a trade.

The next week brings us a slew of reports from banking, technology, industrials and consumer staples.  Names of interest this coming week includes Ebay, Intel, JP Morgan, Goldman Sachs and Citigroup.  We’ll also hear from Bank of America, American Express, Freeport McMoran, General Electric, Schlumberger and Morgan Stanley.  This is a good sampling of what to expect and with the markets already overbought and working off that condition the next move could be higher.

What do I mean by overbought and why do I think it could stay there?  There is a technical concept that very few really know about nor the function, but the idea is simple.  The embedded stochastics oscillator are a persistent technical condition that traps markets into a longer-lasting condition.  An oscillator is simply a momentum or rate of change indicator.  An embedded stochastic as defined by Ira Epstein ‘must have a Stochastic reading over 80 for 3 consecutive days, which will result in an uptrend. These go hand in hand with each other’. (see chart below).  This works for a downward move as well with embedded stochastics below 20.

So we have this current condition and it may persist far longer than many expect.  As we know the market’s intent is to make the most people look wrong or foolish.   We’ll see if that happens again!