Sirius XM Running Up Before Earnings 2.78%, Will It Have Teeth?

| About: Sirius XM (SIRI)

Sirius XM (SIRI) announces earnings tomorrow, August 7th, before market open. Investors seem to be rather optimistic over the contents of the earnings call, sending shares up 6 cents to $2.22 as of this writing on high volume.

CEO Mel Karmazin announced in early July that Sirius XM had added over 622,000 new subscribers in Q2 2012, blowing out expectations and forcing the company to raise guidance for the full year. July auto sales have just been announced and are the strongest ever since 2007. This is extremely important for Sirius XM as it derives the vast majority of its subscribers from new automobile sales. The best July in 5 years for auto sales is certainly something to smile about if you are invested in Sirius XM. While this will not affect Q2's numbers, it solidifies promise for the first month of Q3.

There's also the announcement that Sirius XM will retire $186 million of debt in September. Sirius XM is retiring it early, with cash. The position the company is in now, is in stark contrast to the position they were in just a few years ago when they were forced to take on debt at terrible rates. By paying off this debt early it drives more cash to the bottom line in future quarters as the obligation to pay interest is removed.

It appears that all of this has inspired considerable confidence in investors, and they are placing their bets accordingly. The vast majority of chips seem to be on "long Sirius XM."

But will the current run come crashing down after earnings? Will this be a case of buy the rumor, sell the news? I don't think it will be. With that being said, profit taking is to be expected on any run up, and it helps to understand some technical aspects of the stock so that one doesn't get scared out of their position.

Currently Sirius XM is in a strong uptrend having turned every possible indicator out of the 10, 20, 50, and 200 day simple moving averages, to the positive. The 100 day is the only one left, and it has turned nearly flat for now, and if the current trend in share price continues it will also turn up.

Sirius XM tends to use the 10 and 20 day moving averages as support levels in an uptrend. Pull up any chart over the last few years, load in the averages, and you'll see the share price bounce off the 10 and 20 day over and over again as the stock moves up. Because Sirius XM is well known for being one of the most traded stocks on wall street, it makes sense that these levels would provide support as traders tend to pile in at those points.

So, moving forward into the earnings call, consider the chart below :

(Click to enlarge)

The 10 day moving average is the first line of defense and the most likely point of pullback on profit taking. Currently it sits at $2.14 and goes up at a rate of about a penny per day. This is also a great entry point for those who wish to go long. If Sirius XM blows expectations out of the water on Tuesday, the shares may not return to $2.14 and instead ride up much higher.

If street expectations are simply met it may fall back a bit, then a great opportunity to go long could be found at this price point of $2.14. $2.11 is the second line of defense at the 20 day moving average. I don't expect the price to reach $2.11 but if the call holds some disappointment investors should watch this price point. If it weakens and falls, then lower prices could be in store.

Me? I'm not particularly worried. Sirius XM is outperforming its own conservative guidance, and is even beating the street's higher expectations. As headlines hit of analyst price target increases, additional buy ratings, and record numbers of subscribers, the investment community should react favorably. While the shadow of Liberty Media (LMCA) and their pursuit of control of Sirius XM still waits in the wings, August 7th will be about Sirius XM's performance itself. As an investor who is long Sirius XM, I'm looking forward to the call.

Disclosure: I am long SIRI, LMCA.