4 Key Stocks Face Earnings Test

by Tom Aspray

Stocks opened weak again, Monday, and stayed under pressure for most of the day. The major averages did close above the lows as they are quickly approaching more important support. The PowerShares QQQ Trust (QQQ) closed well below its quarterly pivot at $87.47 with quarterly S1 support at $83.59. The Spyder Trust (SPY) and SPDR Dow Jones Industrials (DJI) are still holding above their quarterly pivots at $183.25 and $160.88 respectively. As I mentioned last week, there are more signs that the Dow stocks are becoming market leaders. The Eurozone markets are lower again in early trading, with the US futures showing slight losses. The McClellan oscillator has dropped further to -108 and is just above the late March low of -115. It needs a day of strong A/D numbers in the next day to form a pattern that is consistent with a pullback in an uptrend. The Arms Index closed at 1.48 but is still well below the March highs of 1.74 and 2.48. With little economic data this week the focus is, of course, on the earnings season. The outlook for earnings has become more pessimistic since the start of the quarter as FactSet estimates that 1st quarter earnings for the S&P 500 are expected to decline by 1.2%. Also, 93 S&P 500 companies have given negative guidance on their earnings and only 18 companies have upped their earnings guidance. With market expectations so low, I would not be surprised if the earnings season actually beats expectations. These four stocks report this week and may give us an important inside look at three important sectors. Click to Enlarge Chart Analysis: Alcoa, Inc. (AA) has done quite well since it was replaced on the Dow Industrials as it has risen over 50% since it was dropped from the Dow. The daily chart shows a solid uptrend, line a, going back to early October. AA hit its daily starc+ band last week as it reached a high of $13.18. The 20-day EMA was tested with Monday’s low at $12.36. The quarterly pivot is now at $11.88 with the daily starc- band at $12.06. The relative performance has been a solid uptrend since last fall as it has clearly been a market leader. The RS line made new highs last week and is holding above its WMA and support at line b. The OBV also made a new high last week but did drop below its WMA on Monday. There is more important OBV support at line c. The weekly OBV (not shown) looks very strong as its WMA is rising strongly. There is resistance now in the $12.8-$13 area. Bed Bath and Beyond (BBBY) slashed 4th quarter earnings estimates in early January and the stock plunged from a high of $80.70 to close the week at $69.94. By early February, it was down to $62.12 and below the weekly starc- band (see arrow). Last Friday, BBBY hit a rebound high of $70.98, which was just between the 38.2% and 50% Fibonacci retracement resistance from the early 2014 highs. The quarterly pivot at $70.58 was slightly exceeded but BBBY closed below it on Friday. There is weekly chart support, line d, now at $63.73 and the weekly starc- band at $63.14. A close below the recent swing low at $66.99 should confirm that the weekly downtrend has resumed. The low in December of 2012 was $54.43. The relative performance shows a longer-term pattern of lower highs, line e. The RS line formed a short-term negative divergence before January’s plunge and still looks weak. The on-balance volume (OBV) broke its uptrend, line g, on the early 2014 plunge. The OBV is close to dropping below its WMA and the daily (not shown) is negative. The daily volume did increase over the past two days with key resistance now at $69.37 to $70.98. Click to Enlarge JPMorgan Chase (JPM) hit a high of $61.09 in late March, and then last Friday, failed to exceed those highs. There is next chart support in the $58.28 area, line a, with the quarterly pivot at $58.43. The daily uptrend, line b, is now at $56.47 with the quarterly projected pivot support at $55.76. The relative performance broke through resistance, line c, and made a new high in March. This indicated that JPM was a market-leading stock. The daily OBV shows a pattern of higher highs since last September and is now testing its WMA. The OBV has stronger support at line d, and then at the uptrend, line e. There is initial resistance now in the $60-$60.50 area with monthly projected resistance at $64.67. Wells Fargo & Company (WFC) also reports its earnings before the opening on Friday. The daily chart shows the new high Friday at $50.49 and then a lower close. The prior swing low is at $48.46 with the quarterly pivot at $47.88. There is additional support at the March low of $47.27 with the quarterly projected pivot support at $45.79. The relative performance broke through resistance, line h, in early March. The RS line shows a strong uptrend, and even with Monday’s lower close, is still rising. The daily OBV made a convincing new high last week but has since pulled back to its WMA. The OBV is still well above the longer-term support at line j. The weekly OBV (not shown) has confirmed the recent highs and is well above its WMA. On the daily chart, there is initial resistance in the $49.50-$50 area with the quarterly projected pivot resistance at $53.92. What It Means: Though the daily technical outlook for Alcoa, Inc. (AA), JPMorgan Chase (JPM), and Wells Fargo & Company (WFC) does allow for a further decline over the near term, the longer outlook is positive. The technical outlook for the financial and materials sectors is positive. I would be looking at both JPM and WFC if they get down to their quarterly pivots as AA is part of the Charts in Play portfolio. Bed Bath and Beyond (BBBY) reports its earnings after Wednesday’s close and does look the most vulnerable to heavier selling. The rebound from the January lows appears to be a continuation pattern, which does favor a renewed decline. How to Profit: No new recommendation. Portfolio Update: Long Alcoa, Inc. (AA) from 10.86 and sold 1/3 of the position on March 20th’s opening at $11.80. Use a stop at $11.35 on the remaining position.

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