Thursday was another small victory for the broader market, but not for all stocks. Some casualties of this quarter’s earnings season continue to look sickly. Moreover, a select crop of Nasdaq earnings misses are well-positioned for healthy bearish gains despite the onset of another bullish virus on Wall Street. Let me explain.
Wall Street has continued to move past the still-growing coronavirus. It now is focusing increasingly on this quarter’s parade of earnings reports, now out in full force. Moreover, confessionals from names such as Apple (NASDAQ:AAPL), Tesla (NASDAQ:TSLA) and Amazon (NASDAQ:AMZN) have allowed bullish investors to sow their oats once more.
Don’t be fooled though. There have been a number of high-profile misses and disappointments that have come under hard selling pressure too. Facebook (NASDAQ:FB) and United Parcel Service (NYSE:UPS) are two market titans which have been ignominiously welcomed into this camp.
It’s within this latter grouping where price charts are still setting up for larger losses. Here, the object of our attention is significantly reduced upside risk. And with the belief that U.S. markets are treading on thin ice in more than one way, these earnings misses should be on your radar for shorting too.
Earnings Misses to Short: eBay (EBAY)
eBay (NASDAQ:EBAY) is the first of our earnings misses readying for a short in your portfolio. The online auction marketplace topped Street profit forecasts but delivered in-line revenues for its fourth quarter. It also issued a warning for the company’s first quarter. The report’s aftermath dealt EBAY stock a blow of 4.5%. But the worst may still be on the horizon.
Investors are fearful eBay is showing cracks in its one-time dominant business model. This fear has pushed shares into a challenge of a neckline within a bearish head-and-shoulders topping pattern. With the right shoulder forming under the larger base’s 50% retracement level, credibility is lent to the view this earnings miss has seen its best days.
I’d recommend shorting EBAY stock here below $34 as the neckline is broken. A stop-loss above $37 — which would break the right shoulder — makes sense. A conservative measured move should fill last January’s bullish gap and challenge $29-$30. But don’t exit too quickly. The stock will likely revisit December 2018’s low of $25.62 in 2020.
Starbucks (NASDAQ:SBUX) is the next of our earnings misses to position bearishly in. After announcing store closures in China — the result of the coronavirus — the coffee giant was already showing some wear. Inevitably, this announcement led to fear. And management’s warning of materially lower earnings in 2020 did nothing but compound those fears.
On the price chart, this earnings miss has now broken key trend-line support on a closing monthly basis. Shares are set up in a bearish hangman pattern. As the formation also establishes a lower-high pattern, the expectation is SBUX stock’s piping hot 2018-2019 rally is ready to turn decidedly chilly for investors.
Starbucks shares are in position to be shorted as early as next week once the low of the January candlestick is broken. I’d use a stop-loss of $95. This strategy only exits the bearish bet on a failure of the lower-high topping pattern. However, size the position accordingly. On the downside, look for a larger correction to challenge this earning miss’s prior congestion pattern and a key Fibonacci cluster of price support from roughly $61-$66.
F5 Networks (FFIV)
F5 Networks (NASDAQ:FFIV) is the last of our earnings misses to trade from the short side. The network optimization outfit beat Street forecasts for its first quarter. But shares were rejected by investors after the company offered a weak, below-views profit forecast of $2.14 to $2.17 against estimates of $2.42 per share.
In the report’s immediate aftermath FFIV stock tumbled 5.1%. This looks to be just the beginning of a more bearish corrective phase. With the earnings reaction, shares of F5 Networks have narrowly broken uptrend support following a weak rally attempt off the price line this past fall. Combined with a bearish stochastics crossover just above oversold levels, this earnings miss looks ready for another corrective leg lower.
FFIV stock is ready to short today as shares close the month beneath uptrend support. But rather than stomach pattern exposure of more than 20% tied to the October high in shares, I’d suggest reducing position risk using a bear put spread such as the April $120/$110 put vertical up to $1.75.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.