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Pre-Earnings Technicals

|Includes: Cummins Inc. (CMI), DWDP

We like to look at stocks that pull back to key trendlines as potential bullish plays.  More importantly, we prefer to wait a couple of days to see if this support holds.  Our 50-day filter pulled up a couple of potential trades – one on a stock that just reported earnings today and another that reports next week. 

Let’s start with DuPont (DD), which reported this morning.  The company beat handily on both the top and bottom lines and raised its 2011 earnings forecast.  But the stock managed only a slight gain today on the news. 

The technicals, however, bode well for the intermediate term, as the stock is rebounding off its 50-day, which has offered up solid support on several occasions for the past several months.

 Also helping the stock is potential unwinding pessimism.  The short-interest ratio is at its highest level since August, which was near the start of DD’s 40% rally.  The put/call ratio is also coming off a relative high, indicating potential buying pressure.  With earnings out of the way (and good numbers to boot), DD should continue its uptrend.

The second stock is engine manufacturer Cummins (NYSE:CMI), which reports next Tuesday (February 1) before the open.  For what it’s worth, truck and engine maker Navistar (NYSE:NAV) today forecast 2011 profits above estimates based on rebounding truck sales amid an improving economy.  Perhaps some of that good news will rub off on CMI. 

After dropping nearly 8% in three days last week, CMI shares have found a base at their 50-day.  Today’s gain of nearly a percent appears to reaffirm another successful test of the 50-day, joining other such supported pullbacks in November, October, August (OK, that’s a bit of a stretch), and July.

 Despite a five-fold increase in share price during the past two years, sentiment toward CMI is surprisingly pessimistic.  The put/call ratio is coming off its highest peak since July, the short-interest ratio has spiked to a multi-year high, and just nine of 17 analysts rate the shares a “buy.”  With solid technical support and firming fundamentals, we see high potential for the release of a lot of pent-up buying power.  You may want to jump on board before earnings next Tuesday.