The current earnings season has been a seesaw, confusing affair, and the market doesn’t quite know what to do. Just one trading session ago, the S&P set a new all-time high.
And today?
Equities are buckling under the pressure of poor corporate revenues.
Even Facebook (NASDAQ: FB) is cratering despite an “earnings beat” revealed last night. And yesterday, shares were up over 1% following a record-setting $5 billion fine – something that would normally scare investors.
But shares just kept on rising.
It seems that these days, down is up and up is down.
Nonsensical trading activity aside, however, I’m happy to tell you that there’s still plenty of opportunity waiting on the “other side” of earnings for cunning traders.
It’s just a matter of finding the right setups.
In the weekly candlestick chart above, we’ve plotted out CAT, which suffered a major “earnings miss” a few days ago. Revenues fell well short of analyst expectations and guidance from company leadership left investors feeling deflated.
So, unlike FB, CAT shares behaved how you would’ve expected them to, dropping almost 4.5% in the trading session immediately following earnings.
And today, bulls are trying to revive the beleaguered construction equipment manufacturer. As of midday, CAT has risen a little over 1%.
But if the market optimists out there can’t bring CAT back to life, odds are that a major short setup could be in the works.
One that sets a new low for the year.
You can see in the chart that CAT already set a lower low just a few months ago, and despite selling off heavily this week, stochastics remain sky-high – suggesting that CAT is surprisingly overbought in the wake of its post-earnings plunge.
Should CAT fail to retrace this week’s losses, a drop below the current week’s low looks unavoidable.
As it stands, the current weekly candlestick is already trading below the last four candle bodies. Any time we have a candlestick trading below a recent series of candle bodies, a bearish reversal soon follows. CAT, in this case, is an ideal candidate for a short trade in that regard.
Add in the fact that investors were so sour about the recent earnings report, and you’ve got a post-earnings trade opportunity that’s ripe for the picking.
Better yet, if a recession is truly approaching (or already here), then companies that “grease the wheels” of society are likely to take a beating. CAT, the world’s largest construction equipment manufacturer, could absolutely tank if the Federal Reserve keeps up their recession talk ahead of their July 31st rate cut.
Because as usual, markets are motivated by two things intrinsic to human nature:
Fear and greed.
If folks start getting scared, you can bet your bottom dollar that they’ll take it out on companies like CAT – ones that fuel economic prosperity. Like rats fleeing a sinking ship, bulls will head on to greener pastures, potentially in the form of red-hot gold mining stocks.
Even if they’ll be forced to buy-in at yearly highs.
