Post-earnings momentum can carry a company so far but, when the dust settles, a bearish picture often emerges in a stock’s chart. Long-term investors can use these pullbacks to add to positions, while traders can short the stock or consider bearish put options as a way to profit from a summer swoon.
Profit Scannerpowered by Recognia has identified two big-name stocks that delivered the goods at earnings, but a look at their charts shows they might fall short in the coming weeks, thus making them targets for shorting or put options:
Setup #1: Visa (V)
Click to Enlarge Visa (V) came out of its second-quarter earnings report looking like a champ, beating estimates by nearly 16% and topping its income of the prior year by 26%. The credit card colossus steadily gained in the weeks that followed its report, but on May 20, Profit Scanner pinpointed a Bearish Symmetrical Continuation Triangle pattern on Visa’s chart.
This pattern specifies that Visa stock could drop to a range of $193 to $196 in a span of 17 trading days, or approximately by the second week of June.
While the short- and intermediate-term pictures for Visa stock are bearish, the longer-term picture brightens so traders should stick to near-term strategies. Shorts could initiate positions at current levels, but stay watchful as support resides at $207.59.
Conversely, Visa stock does not have any meaningful resistance until $222, so short-side traders should protect themselves with a stop-loss. Profit Scanner puts a tight stop on a short position in Visa or for those trading a put option at a close above $213.02.
While Profit Scanner does not analyze options trades, Visa’s options could offer an easy way to short the stock without using margin simply by purchasing bearish put options. For those new to options, be sure to study first, but if you’re familiar with the strategy, consider the V June $200 put options (the monthly options), as the pattern is expected to resolve before June options expiration, so there’s no need to pay for the extra time.
Setup #2: Gilead Sciences (GILD)
Click to Enlarge Biotech titan Gilead Sciences (GILD) released Q1 results April 22, giving investors a 62% positive earnings surprise, and GILD stock has climbed nearly 10 points since. But at the May 15 close, a Bearish Continuation Wedge appeared on GILD’s chart on volume of more than 12 million shares, indicating the stock is setting up for a return to pre-earnings levels before June arrives.
The downside target for the wedge puts GILD stock at $70.75 to $72.50 with 15 trading days of the technical event, or roughly by the second week of June.
The intermediate- and long-term technical pictures for GILD stock remain bullish as of this writing, so use this opportunity accordingly to pick up shares at a discount or play a short-term drop. While Profit Scanner does not analyze options trades, a quick look at GILD’s put options shows fairly robust open interest at the June $75 strike (monthly option), which could be appropriate for some speculative money.
Resistance for GILD stock resides at $82.80, so seeing the stock falter at those levels would lend support a short-term pullback. However, just as important is knowing support lies at the $79.92 level, so if GILD appears to hold there after a lower close, it may bounce up and recover.
For that reason, Profit Scanner has identified a tight stop-loss at a close above $83.58. Short-side traders and those with put options can use that as an indicator that it might be time to exit any bearish positions.
Profit Scanner powered by Recognia can help traders of all levels find new trading customized trading opportunities for finding the best stocks to buy or short in specific sectors, price points, timeframes and so much more. Or use Profit Scanner’s technical insight to validate your own trading ideas. See how easy this powerful tool is to help you uncover hidden opportunities in the market.