Last week, we nailed it.
Both stocks covered in Earnings Edge climbed several percent to break out of the price patterns they were trading in.
Medtronic PLC (NYSE: MDT) climbed over 3% on earnings and pushed above the key resistance point.
Workday Inc. (Nasdaq: WDAY) was up 3% on earnings too, enough to break out of the wedge pattern we looked at last week.
These stocks are now on a trend higher thanks to their strong moves on earnings.
Each week, I look to uncover big movers, but more importantly stocks set to break out of consolidating price patterns.
And we have two more stocks to add to your radar for this week.
We’ll look at teen retailer American Eagle Outfitters Inc. (NYSE: AEO) and tech company Broadcom Inc. (Nasdaq: AVGO).
Earnings Edge Stock No. 1: American Eagle Outfitters (NYSE: AEO)
Earnings Announcement Date: Thursday, before the open.
Expectations: Earnings at $0.54 per share. Revenue at $1.2 billion.
Average Analyst Rating: Outperform
American Eagle is largely a teen apparel giant anchored in malls across the country. It has seen strong growth online though.
American Eagle’s fellow mall competition, Abercrombie, announced supply chain constraints and delayed sales that hurt its results, sending the stock down 10%. AEO only fell 1% during the same time, and it hopes it can outduel its rival and post solid results this week.
As we turn to the price chart for AEO, it is a bit concerning.
The stock recently broke below a key support, in green, and is now trading in a declining price channel.
AEO’s Trend Shifted Downward
The yellow support and orange resistance are the key channels to watch now. Shares broke below the green support a few weeks ago and the old resistance in red is there to note the sideways price channel.
Now that the stock is in a downward channel with earnings coming up, it is not one I’d be bullish on.
I’m expecting the stock to head lower from here, even if it doesn’t do much on earnings this week.
But the options market is looking for a decent move, pricing in a 4.5% pop or drop on earnings. If it pops to the upside but fails to break out of that orange resistance, position for more weakness in AEO.
Before we get into Broadcom, you’ll notice that price is important. To me, it’s all that matters because I’m an options trader. I look for short-term opportunities in the market, and price is the only way we make a profit.
It doesn’t matter if I’m right about beating earnings or right about some economic stat. I only care about being right about price.
I’m telling you this because over at True Options Masters, my friend Mike Carr and I have started a free daily publication dedicated to traders just like us. People who can filter out all the noise that takes place and find the true meaningful indicators to help people make money.
Each day we share our insights, but this Wednesday is our Monthly Market Outlook.
It gives our readers a chance to peek over our shoulders and see what is on our radar for the month ahead. We’ll discuss geopolitics, sector rotation and more.
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Earnings Edge Stock No. 2: Broadcom (Nasdaq: AVGO)
Earnings Announcement Date: Thursday, after the close.
Expectations: Earnings at $6.91 per share. Revenue at $6.75 billion.
Average Analyst Rating: Outperform
Broadcom is struggling with semiconductor supply. I say struggling because it can’t get chips to the market. Everything from cars to the latest gaming consoles are almost a year behind schedule due to supply chain disruptions.
With that said, investors still love the tech sector. And they have been patient during this volatile period, investing in the stocks for the potential rewards as the world continues to open back up.
That brings us to my favorite part, the price chart.
AEO was kind of a depressing chart to look at.
That’s not the case for AVGO.
One of my favorite price patterns (as I often mention) is the ascending triangle pattern. And that’s where we find Broadcom sitting today.
AVGO Is Ready for a Big Move
The horizontal resistance line, in red, is converging with a rising support line, in green. As this narrows a breakout becomes more imminent.
But I like the pattern because it tells us what to expect.
These are typically continuation patterns, meaning the stock heads in the same direction it was already going before the pattern formed. In this case, you’d look for a breakout to the upside.
Then it gives us a price target.
You simply take the height of the pattern and subtract the peak from the trough, to get $70. Then add it to the breakout.
So whichever direction the breakout occurs in, you add $70 to get the price target for the expected move.
Earnings are a likely breakout point.
From here, you’ll be able to play the rest of the $70 price move on AVGO once the direction is clear.
The options market isn’t expecting fireworks this week. It’s only pricing in a 2% move.
The stock will likely move more than that, but I’d wait for the breakout before jumping in.
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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