Shares of Texas Instruments (NASDAQ:TXN) fell hard on Oct. 23 following the company’s latest earnings report. As a result, the stock sliced through some important near-term technical support areas and the path of least resistance points lower still.
When it comes to trading stocks around earnings season, I see too many novices attempt to make bets prior to any given report with the hopes of a windfall by having bet in the right direction. Over time and by my empirical evidence of trading over the past 20 years, such trades only stand about a 40% chance of success and overall see a negative return.
However, once a stock has reported earnings and an initial reaction in the stock has taken place, then the odds of finding profitable trades are significantly higher. Case in point with shares of Texas Instruments, the initial reaction on Oct. 23 was decidedly negative. In my opinion, this bearish reversal has the stock pointing lower still from here.
Texas Instruments Stock Charts
For some perspective let’s look at the multi-year chart where we see the channel that TXN stock has pushed higher over the past decade. After the Oct. 23 selling spree, this stock is now smack in the middle of said channel and could thus all else being equal move in either direction. Given the force of this latest bearish reversal, however, I think the stock has more momentum to the downside for the near-term.
On the daily chart we see that the post-earnings drop on Oct. 23 sliced right through the 50- and 100-day simple moving averages (yellow and blue lines, respectively). Although the stock has now arrived at horizontal support in the $115 area, the momentum looks to point the stock lower still toward the $110 area. Any strong bullish reversal from here, especially one holding on a weekly closing basis, would be a stop loss signal.
The highest probability trade, however, that sets up well for this position in TXN stock is to sell an out-of-the-money call spread (options credit spread) in a very specific way. I am hosting a special webinar Friday, Oct. 25 to go over this setup in detail. Register here.
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