Dow 13K and The Art of Trading Overbought into Earnings
From Costco Wholesale Corp (NASDAQ: COST) to SodaStream International (NASDAQ: SODA), many of the companies that are reporting quarterly earnings on Wednesday are seeing their stocks rally into overbought territory ahead of their announcements. Will traders and active investors sell the earnings news when it arrives?
Traders continued to send shares of Priceline.com (NASDAQ: PCLN) higher after the company reported its blow-out earnings on Tuesday. So from a sentiment perspetive – and with the Dow industrials crossing above 13,000 – traders may be in a mood to press their bets in stocks like Petsmart (NASDAQ: PETM) and Liz Claiborne (NYSE: LIZ) – another pair of stocks trading in overbought territory ahead of scheduled earnings announcements on Wednesday.
But the fact remains that many of these stocks are extended and due for pullbacks, and the longer it takes for these pullbacks to arrive, the greater the chance that the inevitable corrections will be signifcant ones.
That said, there may be more room to run in these stocks even as they enter technically overbought territory. Shares of COST have neutral ratings of 5 out of 10 after closing higher for four out of the last five days. Petsmart has closed higher for three days in a row, and Liz Claiborne have finished higher for the most recent three trading days out of the last four. Both stocks are technicaly overbought, but have neutral ratings between 4 and 6 out of 10 ahead of Wednesday’s open.
There are other stocks that traders might want to be more wary of heading into earnings. Up four days in a row and crossing back into bull market territory ahead of its scheduled earnings announcement, shares of SodaStream International, for example, have earned a negative edge in the short-term of more than 2%. As such, SODA could be vulnerable to a short-term pullback, especially given the stock’s near-vertical run over the past four days of more than 20%.
Also any strength in shares of Rosetta Stone (NYSE: RST) ahead of its earnings announcement should perhaps be viewed with at least some short-term skepticism. Trading in bear market territory for over a year, RST has been rangebound below the 200-day moving average for most of February. Near-term buying likely would put the stock in technically overbought territory and make RST a potential target for short-selling.
David Penn is Editor in Chief of TradingMarkets.com