Now that we have entered earnings season, it is important to check the earnings calendar before you invest or make a trade.
For instance, Amgen (NASDAQ: AMGN) appeared on my bullish scan yesterday, but I also know that the company reports earnings on April 21. With this in mind, I wanted to break down the daily and weekly charts for Amgen stock.
There were a number of biotech stocks on the bullish scan last night, but Amgen stood out. Looking at the daily chart, we see that there is a trendline connecting the lows from the last three months, and the stock just hit it. Secondly, the slow stochastic readings dropped below the 20 level and then made a bullish crossover. The three previous times this has happened the stock has rallied for a gain of at least 10% over the following weeks.
I do have some concern about possible resistance at the $172.25 level. The stock stalled there in December and again in mid-March, but that is almost 7.5% higher than the current trading level. You can see this double top formation on the weekly chart. Also on the weekly chart you can see the trendline that connects the lows from the last 3 ½ years.
The sentiment toward Amgen has a slightly bearish skew, which is good from a contrarian’s point of view. The short interest ratio is at 3.3 and the number of shares sold short jumped from 7.04 million to 10.2 million from Feb. 1 through March 15. Amazingly, the stock was rising during this stretch despite the added selling from short sellers.
Analysts are also relatively bearish, with 11 “buy” ratings and 12 “hold” ratings on the stock. For a blue chip stock like Amgen we would normally see at least two-thirds of the ratings being “buy” ratings.
The consensus estimate for earnings per share is $2.10 for the current quarter. That has actually been ratcheted down a few pennies over the last couple of months. Between the lower estimates and the bearish sentiment, the odds seem to favor a jump rather than a drop in stock price. However, anything can happen when you are dealing with earnings and the reactions from investors.
So how do you play it? If you are a short-term trader, I would look to take advantage of a bounce ahead of the earnings report with options. If the stock moves back up above the $172 level before earnings, you should be able to capture some decent profits with the May call options or the weekly call options that will expire on April 24.
If you don’t want to take the risk of the earnings being disappointing, you can sell the options ahead of time, or you can close a portion of the trade and hold on to the rest to see what happens with the report. Options premiums usually see a little boost ahead of earnings, so you shouldn’t see much time decay until after the earnings report.
Should the company blow out expectations, the resistance should be pretty easy to overcome. If the earnings are a total disappointment and the stock starts falling, I would definitely be a buyer down around the 52-week moving average, and I would look at that as a long-term investment.
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