Options Insights: Are We in For a Pullback as Earnings Begin to Trickle In?

Market stage of fantastic rally this week: Are we in for a pullback as earnings begin to trickle in?

The Dow Jones, the S&P 500, the NASDAQ 100, the Russell 2000, gold, and oil were all up this week significantly, letting investors know that the bulls are firmly in charge.    The only two things that were down were treasury bond prices as well as the VIX, trading at its prem-pandemic lows.

The rally was broad-based with every sector up this week, putting 71% of all stocks above their 50-day moving averages (see below).

Some companies began to report their earnings, specifically the banks and some airlines. Many of these companies gapped up and sold off the day after they released their numbers. This tells me that there are many shares out there that are “priced to perfection” and the safest way to play earnings is to not play at all.  

What I tell my Traders is this: you can make just as much money trading the reaction to the news as you can trying to speculate on direction prior to the news. A good example of this would be DAL.  

The stock rallied into earnings and after the news came out pulled back comfortably into its 20 day moving average providing a possible excellent entry point (see below).  

With the stock running out of gas and taking a break from a huge rally, it can now attract more buyers at these levels who missed the boat the first time.

Another example of trading the reaction as opposed to the earnings themselves on the bear side would be UNH.  This stock is in a weak/underperforming sector (healthcare) and is still below its moving averages, despite the move it has after earnings.  

The news caused the stock to pop and touch the 50-day moving average, only to roll back below it intraday.   This also provides a great entry point for a bearish setup (see below).

As an options basket Trader, it is important to have both longs and shorts at all times although having a bullish bias going into this week is definitely warranted.   

I will be using any pullback we get to look for buying opportunities and on the short side bearish trades that I’m taking will be much less aggressive in nature.  The great thing about options is that you can put this all together in a weekly strategy, and add and remove things as markets unfold.

Since many names have rallied leading into the earning season we may see some disappointing price action. 

The good news is we can use these earnings moves in our favor like I Illustrated above

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