Earnings could pressure the market this week, writes MoneyShow's Tom Aspray, and owners of these three stocks should take note.
Most major averages showed minor losses last week. The Dow Industrials lost just 0.1%, the S&P 500 was down 0.38% and the Nasdaq lost 0.13%.
However, the Dow Jones Transportation Average was hit hard, losing 5.85%. The lagging action of this sector has been a concern since early in the month, and it did break more important support Friday.
The earnings and comments from FedEx (FDX) last Tuesday helped to reverse the recent strength in the Transports. The company not only drastically reduced its guidance for its May 2013 year, but also lowered its projection for global GDP growth.
Aside from this, stock market lost some upside momentum last week, and the stock index futures are down early Monday. A close under last week's lows at $145.63 in the Spyder Trust (SPY) and $69.79 in the PowerShares QQQ Trust (QQQ) will be the first sign that a further correction is underway.
The analysis of the three stocks featured below suggests they are likely to be quite vulnerable as they release their earnings.
Chart Analysis: Nike (NKE) last reported earnings on June 28, when its stock closed at $96.89. The 8% drop in income was not expected, and the following day NKE opened 8.7% lower at $88.39. NKE is reporting earnings on September 27.
- NKE had a low of $85.10 in late June, and has since rallied back to a recent high of $100.92. This was just slightly above the 50% Fibonacci retracement resistance at $99.98.
- The rally appears to have stalled below the 61.8% resistance at $103.50.
- NKE closed on the lows last week, and shows a bearish candle formation. Next support sits at $95, then $93.50.
- The daily uptrend (not shown) was broken on September 14.
- The weekly relative performance analysis violated support (line a) two weeks ago.
- The weekly on-balance volume (OBV) broke its uptrend with Friday's close. Volume over the past two weeks has been the highest since July.
- A close back above $100.50 would be a short-term positive.
Walgreens (WAG) releases its earnings on September 28, and has a current yield of 3.1%. The stock plunged to a low of $28.53 in June, just after its last earnings report.
- WAG rallied impressively from the lows, peaking at $36.85 in early August. This was just below the 50% Fibonacci retracement resistance at $36.94 that was calculated from the June 2011 high of $45.34.
- The weekly relative performance rallied back to its key resistance (line d), but has now dropped back below its WMA.
- The RS shows a longer-term pattern of lower lows (line e), which is a sign of weakness.
- The weekly OBV is much stronger, as it has been able to rally above its resistance (line f). It did make new lows in June.
- The daily OBV (not shown) has been below its WMA since the middle of August, and has made lower lows.
- There is support now at $34.60 to $33.60.
Red Hat (RHT) is a $11.1 billion application software company that peaked in April at $62.75. RHT made a low in early June low at $49.45. The company reports earnings after the close on Monday.
- The rally appears to have recently lost upside momentum, as the uptrend (line b) was slightly broken last week.
- The weekly chart shows an apparent rising wedge formation (lines a and b).
- There is weekly resistance now at $60. The 61.8% retracement resistance at $57.69 was already overcome.
- The weekly relative performance has formed lower highs over the past few months (line c), and has just broken its long-term uptrend (line d).
- The weekly OBV has also failed to make higher highs (line e), and is now testing its WMA. Volume picked up last week.
- There is key weekly support now at $55 to $55.68.
What it Means: It is always a tough call if you are holding a stock going into its earnings report. Owners of Bed, Bath & Beyond (BBBY) and JCPenney (JCP) probably wish they had taken action before their reports last week, as BBBY was down 13% and JCP lost 10.2%.
In a recent Trading Lesson, I discussed how I use the combination of Fibonacci, relative performance, and OBV analysis to help identify stocks that are vulnerable to earnings shocks.
All three of these stocks look vulnerable based on the weekly technical studies, especially Nike (NKE) and Red Hat (RHT). Those who hold these stocks should have firm plans before the earning reports are released.
How to Profit: No new recommendation:
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.