Caution Is Being Richly Rewarded This Earnings

It feels like we're winning even though we're in cash!

In my previous article, I mentioned that this was not a time to be gung ho, and more a time to see how earnings plays out before piling into a position.

The last few days have vindicated this viewpoint to such a level that it feels like we're winning even though we're in cash!

Seasoned OVI traders will know how we've nailed some wonderful earnings gems over the years, but this earnings is uniquely different.

It's occurring right on a feverishly contested presidential election that the market perceives could have dramatic consequences, depending on the victor.

Hot on the heels of the continued Brexit uncertainty, still toppy indices, and a nervous global political environment, this is an earnings that is too uncertain to enjoy a pre-earnings punt.  If anything, it's a time to consider bearish earnings plays.

Remember my OVI Sentiment Chart of the S&P 500?  

The S&P 500 OVI Sentiment Indicator is still officially green, but only just.  Observing the momentum from the chart below, it is clear to see the bears (the red line) have almost caught up with the bulls (the green line).

This time last year we had the exact opposite scenario where the bulls were catching up with the bears, and I declared myself bullish during that time, even before the OVIsi had changed colour.  This yielded some fantastic earnings trades such as MSFT and others.  

This year the main difference is that we have other factors influencing investors.  I've said for weeks that I could see hedging going on from mid-September.  That does seem now to be crystallizing into some proper bearishness, though things could turn on a dime depending on the election reaction.  

So, while the official line is to remain in cash until after the election, it's still worthwhile to keep up with setups that we like the look of.

As such, I'll outline a few bearish setups, starting with A, which is forming a textbook bear flag.  Earnings is on 15th November.  

CHK below: gapped up at earnings yesterday, but closed at the lows for the day.  Further downward pressure could send the stock back down to around $4.00, but it needs to break Wednesday's low first.  

Nice setup for SHW … A gap down after earnings and now a bear flag with a negative OVI.  Needs to break Tuesday's low.  

WHR is another post-earnings gap down, with bear flag and a persistent negative OVI that has correlated well with the downward trend since late August.  

So, for now we're in cash as one little piece of news at this frenetic pre-election time could send the markets hurtling in another direction.

Remember, we play the odds, and right now those odds are skewed by factors outside the norm.  This is only a temporary phenomenon, which is why we keep observing interesting setups like the ones I've just shown you.

Even when we're being quiet we still do our daily maintenance of looking at charts which only takes a few minutes.  This means we're ready to pounce quickly when conditions change – which can be very fast.

All the best,

Guy Cohen