Morning Market Thoughts
Good morning. The futures are set to open up this morning, with Wal-Mart ($WMT) and Home Depot ($HD) both trading higher after reporting earnings that surprised to the upside. Both are Dow components, but they are as different as night and day. Assuming that Wal-Mart opens at around $71, it is still down about 21% from the all-time high back in January of 2015. So it’s been under distribution for quite a while, though it did recently run up about 6% in anticipation of a bullish earnings report. The challenge for the bulls is that WMT is opening right below established resistance at $72.00. It’s rarely a good idea to chase a stock that gaps up, unless it’s popping out of a sleepy volatility squeeze. That’s not the case with WMT, so be careful if you’re buying this gap. I wouldn’t do it. But I’d also be wary of shorting the gap because the market is strong. In strong markets, stocks that gap on a good earnings report tend not to be the ones you want to short. For me, it’s a “do nothing.” But it will certainly add energy to the market this morning.Home Depot (HD) is different, though the earnings results are similar. Their earnings beat estimates by about 7.5% (10 cents), and revenue also surpassed estimates. They also announced a $15 billion share buyback program — investors LOVE buyback programs. They love it when a company buys the same shares that they own because it decreases liquidity, which makes the stock more difficult to buy. Buyback programs also attract investors who…love buyback programs. Last week HD broke above established $140 resistance, and should open about 4% above that level. Remember, prior resistance, once broken, becomes new support for strong stocks that pull back. If the stock pulls back, it needs to hold above $140 to be a viable investment candidate.
You want to see demand at prior support because it reveals the presence of eager buyers who would love to be able to pick up some stock at pre-earnings levels. They feel like they’re getting a second bite of the apple if the stock pulls back. As a consequence of the presence of eager buyers at the prior breakout level, the stock holds at support. Boom! That’s your signal to buy the stock (assuming you are in that crowd of buyers who has been hoping for a better entry. That may be you…or it may not be you.) If this support level doesn’t hold, then this stock should not be bought because you are bucking the tide. With no eager buyers waiting below, a stock that jumped up on positive earnings can fall quite a bit as profit-takers sell the stock to a low-demand market.
This is a similar concept explained in my weekend video describing Netease ($NTES), which enjoyed a tremendous run last week after blowout earnings. You’ve got to identify demand. If you know where the buyers are, you have more confidence in your position. Incidentally, I received some positive feedback on the NTES video this weekend. There really are a lot of trading tactics and concepts about buying gaps in that video. If you haven’t had a chance to view it, you might wish to make time. I think it will help your trading. I use these tactics all the time. Not all the trades are winners, but I definitely have an edge that was lacking earlier in my trading career.
I’ll be in the forum this morning and hope to see you there. Also, don’t forget about tomorrow’s Members Only training session at 12 noon eastern time (9 am pacific time).
Have a good day, and run with the bulls.
–Dan
Market Update