Earnings are all about breakouts, and today we’ll look at two stocks on the verge of a breakout: pharmaceutical giant Johnson & Johnson (NYSE: JNJ) and chip stock Texas Instruments Inc. (Nasdaq: TXN).
The big pops and drops for stocks on an earnings announcement are fun to watch.
But when they signal a clear breakout, they give you clear ways to trade the stocks even after a big move.
PepsiCo last week was a great example.
I showed you how the stock was riding an upward price channel, waiting for a breakout.
Then earnings came, and just like that, the stock broke out to the upside. All it took was a 3% move on their earnings announcement to jump above resistance, but now we know PepsiCo is set to continue climbing over the next few months.
Blackrock, our other Earnings Edge stock last Monday, rallied into earnings but fell 3% on the announcement causing shares to remain stuck in the uptrend.
So even though Blackrock shares fell on earnings, it’s likely heading higher from here as well, thanks to the rising price channel it is trading in.
A lot of stock traders try to ignore moves of just a few percent. They are looking for the next stock to double, not picking up pennies for a couple of days.
That’s what options traders love, though. The quick moves, even if it is just a percent or two, offer us the ability to bag quick double-digit or triple-digit gains.
That’s why I recently created a new free e-letter with my friend and colleague Mike Carr just for options traders. We help our readers spot short-term opportunities and expert insights every day.
It’s called True Options Masters. Click here to join us today.
Here’s what to watch this week.
Earnings Edge Stock No. 1: Johnson & Johnson (NYSE: JNJ)
Earnings Announcement Date: Wednesday, before the open.
Expectations: Earnings at $2.29 per share. Revenue at $22.5 billion.
Average Analyst Rating: Outperform.
JNJ has been hit with what you would think are negative issues for the stock. While JNJ has an active vaccine for COVID-19 available under the emergency authorization, theirs has had a few more warning issues come up — blood clots and a rare Guillain-Barre side effect.
Now, in the middle of summer, it has to recall sunscreen over a chemical that causes cancer.
Yet, traders are still pushing the stock higher. JNJ’s share price is flirting with its all-time highs heading into earnings this week.
All-time highs are about as bullish as it gets.
They tell us a stock is climbing, and since it is within reach before earnings, a breakout to those highs or better would be extremely bullish.
JNJ Is Poised for a Breakout
JNJ only needs to move 2% to hit either support or resistance and be on the edge of a breakout. But options traders are not even expecting a move that big this week.
They are pricing in just a 1.1% move for JNJ.
Regardless of how large the stock is, the ascending triangle above doesn’t lie — this chart says the stock is about to make a pretty big move.
Once one of those key levels breaks, look for JNJ to move 15% in a matter of weeks.
I’m calling for a double-digit move because the height of the pattern above is $29 a share. When triangle patterns breakout, the target price is determined by adding the height, $29, to the breakout point. That’s about 15% to the upside or downside.
A move of that size isn’t expected to come this week on earnings, but once we get a clear breakout, you can jump in and enjoy the ride as it advances towards a $29 price move.
Earnings Edge Stock No. 2: Texas Instruments Incorporated (Nasdaq: TXN)
Earnings Announcement Date: Wednesday, after the close.
Expectations: Earnings at $1.84 per share. Revenue at 4.3 billion.
Average Analyst Rating: Outperform.
TXN is a large semiconductor stock that has also faced its share of headwinds over the last year or so.
From factory shut downs to shipping delays and now an ongoing chip shortage, semiconductors have never been in limbo like this before.
We can see it on its price chart by the wedge pattern that has formed over the last few months. But it’s the green support line that goes back more than a year that you want to watch.
TXN Could Have a 15% Breakout
The whole time TXN has made a strong run higher, nearly doubling in price, those headwinds have remained true.
We are just not getting closer to a normal operating environment, and it’s another dilemma for traders to face as we head into a pivotal earnings announcement this week.
Traders will be looking to overreact to any good news or bad news they hear.
Still, the market is only pricing in a 2% move this week. Nothing crazy. But here’s the good news — all TXN needs is 2.5% to breakout.
Taking the same logic as triangle patterns, the expected move on the breakout for Texas Instruments is 15%. And I don’t think we’ll see a double-digit move on earnings, but it will pave the way for the breakout over the coming weeks.
Be ready to react to the earnings that come out and profit as TXN breaks out of this wedge pattern.
Chad Shoop is a Chartered Market Technician and options expert for Banyan Hill Publishing. He is the editor of three leading newsletters: Quick Hit Profits, Automatic Profits Alert and Pure Income. His content is frequently published on Investopedia and Seeking Alpha. Check out his YouTube Channel to see his latest market insights.
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