Leading Stocks Hit Earnings Season

Click on Chart to Enlarge

I didn't have really anything important to cover today, but I wanted to see if the RSS feed is working OK.

This week and next week are the peak of earnings season and it will be interesting to see how some leading stocks, and the markets in general respond. Earnings reports can generate big moves in individual stocks, and sometimes that info can be useful in assessing the market direction. Of particular interest this week are stocks like AAPL and AMZN which both have been very strong for several months and both have made major gains since the January earnings report. AAPL gapped up today, and it looks like AMZN will gap up tomorrow.

What I am wondering is if these gaps will be exhaustion type moves. Huge gaps off of oversold conditions can often be breakaway gaps which lead to major gains in the following months. But modest or large gaps after a big run up in the stock as it heads into earnings are classic for exhaustion gaps. One thing to watch closely is if the price completely fills the gap in just a few days time, indicating little follow through buying (or actually selling) right after the news is out.

The chart above is Amazon.com, AMZN. The stock is up about 100% in the last 5 months and has had a steady run higher since its January earnings period. The stochastics is glaringly divergent on the recent new highs already indicating waning momentum. Also, the decline off the bull market highs appears to be a pretty ideal expanding triangle. The most common Fibonacci relationship (if there is one) in an expanding triangle is that wave E is 2.618 times wave A on a percentage basis. That is about perfect in this case (wave E is -62%ish and wave A is -24%ish).

Also, large expanding patterns like this are most common as a first phase of a very large complex correction, so the pattern is appearing in the correct place. This is useful to know, because the E wave is so powerful that the post triangular thrust after an expansion like this, will usually not retrace the E wave completely. Since the stock is not far from the beginning of wave E, that would suggest that the rally should be ending soon.

While I don't plan on trading this, I will be watching AAPL and AMZN in coming days to see if these moves look like exhaustions and any gains on earnings are imemdaitely given back. If so, and the leaders start to give back some gains, I think we could more concretely count on some market downside in the coming few weeks.

As for the current BGZ trade, the short-term model is neutral and the 60 min stochastics is about mid range. So, when the next oversold signal comes, will be the time to evaluate a longer hold or not. From several aspects, I would still think some weakness in coming sessions is most likely.