KATE daily July 29th

KATE (Kate Spade & Co.) will trigger a short entry on the open tomorrow unless the stock opens above 38.90. T2 is my preferred swing target at this time. Stops should be based upon one’s preferred target although a relatively tight stop can be placed above 41.10.

Note: KATE is scheduled to report earnings on Aug 14th. Also note that I had mocked up this chart shortly after 3pm ET with the intention sending out the setup well before the close. However, I decided to add the following market commentary & charts below which took quite a while put together. Hence, my original entry criteria was met by the close today but will have to be changed to the open tomorrow as per the comments above.     Click here to view the live, annotated daily chart of KATE

On a related note, on KATE as well as several of the recent new trade setups, I have included the upcoming earnings release dates (if scheduled in the near-future) as we are still in the midst of earnings season. In last week’s post titled Earnings: To Hold or Fold?” I had discussed how each trader must make the decision whether or not toinitiate and/or hold a position just before and into earnings. FWIW, I continue to notice that the vast majority, if not all of the stocks on my short trade ideas watch-list (my personal watchlistlist, not just the Short Trade Setups listed on the site) continue to exhibit bearish price action following their quarterly earning report and forward guidance.

In that post last week I had used the example of a couple of the regional bank short trade ideas that I was watching. A couple of the more recent examples are CSGP and OSK. CSGP was a short trade that was stopped out immediately following the open on what I can only assume to be a handsome earnings beat & rosy outlook by the company. However, as I often state, it is not the initial reaction that counts, rather the price action in the days following a major news event or earnings announcement.

CSGP ripped sharply higher due to buy-side order imbalances immediately after the market opened but all that buyer enthusiasm was slowly & steadily faded by sellers throughout the day, with the stock  giving back roughly 80% of those post-opening gains by the end of the day. Coincidentally or not, the stock closed right back under the key uptrend line which was a trigger for the short entry a couple of weeks earlier.

At times when swing-trading, I will use only a daily close under or above a support or resistance level in order to trigger my buy or sell signal. In hindsight this should have been one of those times but the take-away from this is for those who are opting to hold some promising long or short positions into earnings, you might consider waiting to see how the position trades throughout the session if you are caught on the wrong side of the gap. If we look at a the same daily chart on CSGP using a line-chart instead of candlesticks, we see a simple successful backtest of the recently broken uptrend line as the line chart ignores the intraday “noise” and only plots the daily closing prices.

Another example of how the lasting (not necessarily the initial knee-jerk reaction) directional move in a stock following earnings surprises, beats or misses, is more often than not foreshadowed by the technical posture of the stock leading up to the earnings date would be OSK. Unfortunately, OSK was one in a long list of attractive looking short setups that I’ve had on my recently expanding watchlist that I decided not to post on the site recently because the stock was scheduled to report before the open today. As with nearly all of my watchlist stocks, the post-earnings price action was foreshadowed by the bearish technical developments on the charts. First, in late April, OSK broke down below a bearish rising wedge pattern defined by a 2-year uptrend line. Then on Thursday, OSK broke below the white support line (my price alert is shown at the bottom of the chart).  All-in-all, very bearish technical action with the knock-out punch coming following this morning’s earnings announcement & the stock plunging nearly 14% today.

 

Hindsight is 20/20 and I never share a “would of, should of…” missed trade idea unless there is a takeaway that may add value going forward. My point is that the bulk of the attractive trade setups that I have come across lately are short trade ideas. Of those stand-out trade ideas, many are scheduled to report earnings soon. This leaves me with two options: Either pass those trade ideas along in order to let each trader decide if they want to risk establishing a position in front of an earnings release or sit on the ideas, taking some personally but not passing them along, worrying that some inexperienced traders may over-commit to one of these positions that goes the wrong way or fail to properly diversify amongst various individual stocks and sectors, concentrating too much trading capital into one or just a few individual trade ideas. I’ve decided to go with the former, sharing some of the more promising trade setups but again, it is imperative that each trader decides not only what positions are suitable for their own unique trading style & risk tolerance but also whether or not to hold positions into earnings, where gaps of 10% or more are a common occurrence.

GDP vs. $SPX

One final note regarding the broad market, despite some big post-earnings moves on many stocks as we are just rolling off the peak of earnings season, I was a bit surprised at the relative lack of volatility in the broad market lately. However, I don’t think that we are out of the woods on that one just yet. With the Fed meeting today and scheduled to announce the details of their meeting tomorrow afternoon, plus the GDP report due out tomorrow morning, we still have the potential for some fireworks in the broad market this week and going forward. Personally, I never put much stock into what the Fed says and I never trade (enter or exit positions) based on the initial reaction following the Fed announcements, as those knee-jerk reaction moves are usually just noise and often faded rather quickly.

It is the GDP report tomorrow that I am more interested in. I’d imagine that most are aware that the previous (Q1) QDP number was the worst since Q1 2009, at the tail-end of the Great Recession. Most are also aware that the markets completely shrugged off that huge plunge in GDP growth and dismissed it as just an aberration, with some chilly winter weather blamed as the likely culprit. The problem with that is that the market not only shrugged off that horrible GDP print but went on to new highs following it. Therefore, is there really more upside potential in stocks, should we get a solid number or is the risk skewed more so to the downside, should we get another miss on GDP expectations and the “abberation” starts to look more like the possible beginning of a new trend? Bottom line is that between the GDP numbers before the opening bell tomorrow & the Fed announcement tomorrow around 2pm ET, coupled with the current posture of the equity markets, sentiment readings, etc…, I’d have to say that the odds for a negative market reaction in the coming days/weeks outweighs the odds of a sustained upside surprise (rally) in equity prices. Still too early to bank on it (via betting heavily short) but with most major indices sitting precariously above key trendline support, significant sell signals are potentially just a “very bad day or two” away.