When looking to take advantage of strong earnings-related moves using options, you can use sentiment to help identify these opportunities.
Stocks with strong technical support (often provided by the 50-day moving average) that are associated with negative sentiment (high put/call ratios, high short interest, fewer “Buy” ratings from analysts) are candidates for strong bullish moves in many cases.
Such low expectations mean that earnings will often surprise the Street, and that can lead to strong bullish moves.
I’m going to give you three such stocks. All are enjoying support from their 50-day moving averages and are the subject of negative or skeptical sentiment to a certain degree.
What’s more, all report earnings next week.
1. Amazon.com (AMZN) — Reports Thursday, Jan. 29
Yeah, I know. AMZN is a retail stock. But it’s weathered the storm better than most retailers. And as the chart shows, the stock is hanging in there thanks to a combination of the $50 level and 50-day moving average.
Earnings expectations for Amazon.com have been scaled way back. The Street looks for profits to retreat 17% in the fourth quarter. Compare that to the average 69% gain during the past four quarters.
Analysts are skeptical of AMZN, as only a quarter of them consider the stock a “Buy.” With expectations low and chart support holding, AMZN could pop next week.
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2. Bristol-Myers Squibb (BMY) — Reports Tuesday, Jan. 27
You’d think a company in one of today’s few “hot” sectors — big pharma — would be getting more love. But that’s not the case.
Only half of the covering analysts rate the shares a “Buy,” so there’s plenty of room for upgrades. BMY’s put/call ratio is on the rise (i.e., more put trading volume compared to call volume), and so is short interest.
Although BMY is off from its early-January high, the stock has found support at the $22 level and should benefit from its 50-day moving average, which is moving into prime support position.
Earnings expectations aren’t huge for BMY, so a solid report this coming Tuesday could start some pessimism unwinding that causes the stock to bounce from technical support.
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3. CA Inc. (CA) — Reports Thursday, Jan. 29
You might remember CA from its previous name, Computer Associates, as in the IT management software company.
The Street is expecting earnings growth of just 6% from CA for the third quarter. This pales in comparison to the 31% average year-over-year gain of the past four quarters.
What’s more, CA has missed just one earnings forecast in the past 10 quarters, so the odds favor the company next week.
Technically, the stock has pulled back to the combined support of its 50-day moving average and the $17 level. We like such pullbacks to support levels, especially when they’re accompanied by lower analyst expectations.
Besides the modest earnings growth projections, options players are betting against the shares. CA’s put/call ratio has spiked to some of its highest readings of the year, meaning that options traders are doubting the shares.
We love such negativity on a stock that wasn’t hit that hard during the market’s recent downturn. With expectations low, look for CA to bounce off its support and potentially set new 2009 highs.
Keep your sights set on the 50-day moving average. Pullbacks to support and rallies to resistance can present powerful trading signals. And powerful trading signals, in turn, serve as a powerful foundation for making solid, short-term options trades.
Jon Lewis is the co-editor of The Winning Edge trading service designed to help you make options profits around corporate earnings and other market events. For more information about Chris, read his bio here.
