Despite the potential for upside earnings surprises from many of the tech sector leaders, a proven technical indicator says it’s a high risk time to buy these shares.
Last week was a rough one for stocks, but as we head into a heavy week of earnings, there are signs that the Nasdaq 100 is now leading the S&P 500. Since the June lows, the Powershares QQQ Trust (QQQ) is up 7.9% versus just 4.6% for the S&P 500.
This could be especially important this week, as some of the biggest names in the Nasdaq 100 are scheduled to release their earnings. Last week, Google, Inc. (GOOG) surprised the Street with earnings that were much better than expectations.
Knowing whether a stock is overbought or oversold going into earnings can help investors decide what, if any, action should be taken. Just a month ago, GOOG closed 2.3% above its weekly Starc- band, and this past week, it closed 4% above its weekly Starc+ band.
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The table above lists the 20 stocks in the Nasdaq 100 that are the closest to their weekly Starc+ bands. As illustrated last week (see “4 Most Overbought Dow Stocks”), the weekly Starc bands can be powerful analysis and decision making tools.
Several stocks on the list, including Wynn Resorts Ltd. (WYNN), Apple, Inc. (AAPL), and Microsoft (MSFT) will report earnings this week. The past history of WYNN is a good example of what price action can be expected when the weekly Starc+ bands are tested.
As I have mentioned many times in the past, just because a market or stock is testing its weekly Starc+ band, it can still go higher, but the probabilities of a sharp correction are higher. This makes the risk of buying at the Starc+ bands higher. For those looking to hedge existing long positions, the bands can be a helpful for selecting a price level at which hedges might be established.
Conversely, if a stock is in the middle of its bands, it is important to look at the other technical studies such as the volume to gain any insight as to whether the earnings are likely to be better or worse than expected.
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Chart Analysis: The daily chart of the Powershares QQQ Trust (QQQ) shows that it has so far held well above the 50% retracement support at $56.50 while the Spyder Trust (SPY) has exceeded its 50% support level.
Wynn Resorts Ltd. (WYNN) closed Friday at $162.62, just 0.6% below the weekly Starc+ band at $163.58. WYNN reports earnings after the close today (July 18).
What It Means: The action in the Powershares QQQ Trust (QQQ) could be a sign that the technology sector earnings are going to be strong for the second quarter. Clearly, with all of the other concerns about the markets, both here and overseas, this would be a plus.
As I noted here, the Nasdaq 100 Advance/Decline (A/D) line has just tested key support, so the A/D numbers early this week will also be important.
How to Profit: The close proximity to the weekly Starc+ bands may be a reason to not get caught up in the euphoria over stronger-than-expected earnings. Many of the stocks in the Table A are scheduled to report earnings before the end of July, so I would suggest saving a copy of that table for future reference.
On Tuesday, I will continue the discussion of the Starc bands and earnings by examining some of the other Nasdaq 100 stocks that are reporting this week.