The market's "fallen star" is scheduled to report tomorrow after the closing bell. Specifically, Apple's (AAPL) earnings releases tend to occur around 4:20-4:30 pm.
Generally, forecasting an earnings release and the market's reaction to it is very difficult. This time, however, some situations have presented themselves that can give us hints as to how the market's reaction to earnings will be. Certain that many readers are or have already placed money at risk, these probabilities and conditions should be useful.
Typically, Apple's earnings announcement approaches traders as somewhat of a "all or nothing" roulette game, since the stock usually experiences a large price swing between the day of earnings and the day after. In fact, in the past 2 years (8 earnings releases), only twice has the stock moved less than 3% from its previous close on the day after earnings.
Probabilities And Negative Surprises
So let's jump into the probabilities. Statistician, Tom Bulkowski, owner of ThePatternSite.com has done extensive work on earnings releases, and found over a large array of stocks that earnings misses are followed by earnings misses 74% of the time. That means, at face value, that Apple only has a 26% chance of beating its analysts' expectations tomorrow. But considering that the company has missed three times in a row, the probability of having three negative surprises, following the first one, which has already occurred, in a row is .74^3, or about 40%. It's the same issue when flipping a coin. Does getting heads 9 times increase the probability of a tails on the next flip? No, but a run of 10 heads would be a much rarer occasion than a run of 3 heads.
While the price of Apple slips, the media and individuals have claimed, "It's hated so much! Any bad news is already digested and all good news will come as a surprise." Well, according to PredictWallStreet.com, there are still plenty of loyal Apple bulls out there. Specifically, as of Monday evening:
- 82% of 188 voters expect AAPL to be up by the end of trading (assuming that means post earnings)
- 74% of 163 voters expect it to be up from where it is now one week from now
- 81% out of 90 voters expect it to be up from where it closed today one month from now
- 83% of 181 voters expect it to be up from today's closing level three months from now
Is this bearish, given the traditional use of sentiment as a contrary indicator? Not necessarily. It just means that the investing public is still largely bullish on Apple, and will likely also have high expectations for their announcement tomorrow. That actually sets the stage for a possible negative reaction to the announcement, even if analyst expectations are met or slightly exceeded.
All things considered, it appears that probabilities favor another negative quarter for Apple. However, if it does beat by a large enough margin to make the price gap higher, sellers will likely be waiting near the 420-425 area, which has acted as a previous support zone for the stock. If that level is broken, the next level of resistance appears to be closer to 475. That said, for those aggressive investors holding weekly option positions; if the price gaps to the 420-425 range then stalls, and you are holding a profitable position, I suggest not waiting until expiration, as there is a good chance sellers will enter by week's end and push the price back down.