The Tell From Smart Money

October 14, 2013, 09:54 am ET, BY Neal- Contributor| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

Earnings season is just getting underway, and a few very important earnings releases are coming over the next few days.  We have conducted an analysis of these companies in order to provide investors with a summarized earnings analysis (both past and present), but also, and more importantly, a price-based observation that might be better suited for investors who are anticipating price action after earnings are released.

Of course, we already know that stocks sometimes do the exact opposite of what we might expect after earnings.  A stock might fall after it beats estimates, or increase after a miss, so although an evaluation of earnings data is clearly important, a close look at the recent decisions of smart money is as well.

This combination of simple earnings data and price-based analysis can help investors not only understand earnings results, but also anticipate the stock’s move after earnings are released.

The following Companies report earnings on October 16 2013.

American Express Company (NYSE:AXP) is scheduled to report its Q3 earnings on Wednesday October 16 after the market close.  Estimates are for the company to earn $1.22 per share, which would be an increase of 12% from the same quarter last year. American Express announced recently the launching of the Citi PremierMiles American Express Card in Malaysia. This partnership will enable Citibank to issue Amex cards in the Asia Pacific region, which has very strong growth potential for the company, as it will open the door to the rising economies of the Asia Pacific region. Is the stock a good buy going into earnings?

According to our real time trading report for AXP, the stock just bounced off support after falling 7% over the last 3 weeks.  By definition we prefer to buy near support levels when they are tested because that allows us to maximize our return, our target is resistance and we want to get the complete oscillation from support to resistance, but it also helps us control risk, and that is the most important part. The stock has already begun to move higher and it is far enough away from support to be unattractive to us as a new buy, but support was tested, it held, so the stock is likely to move higher towards resistance according to our report, however we do not advise chasing the stock because of increased risk.

eBay Inc (NASDAQ:EBAY) is expected to post EPS of $0.63 for Q3, which is a 15% increase over the same quarter last year.  The stock has been an underperformer this year, as it is only up about 5% YTD, after a 67% increase in 2012.  About 40% of eBay's revenues come through PayPal, so the recent news about Amazon Inc.'s (NASDAQ: AMZN) Login and Pay was not good for EBAY.  The new online-payment option allows consumers to avoid juggling multiple accounts and takes advantage of Amazon's 215 million active customer accounts.

Throughout 2013, smart money has been selling shares of EBAY when the stock trades near resistance.  The stock is getting closer to resistance again and this time right before earnings.  Even if the company beats estimates handily, it does not mean the stock will continue to rise, as the chart shows that price matters.  According to rule, we are sellers at resistance, and as long as the stock remains below resistance, we expect lower levels and a test of support. Based on the real-time trading report published by Stock Traders Daily, EBAY is a sell/short at resistance, with risk controls in place if resistance breaks higher.

International Business Machines Corp. (NYSE:IBM) will be reporting earnings for Q3 on Wednesday October 16 after the bell.  Estimates are for $3.96 per share versus $3.62 a year a year ago in the same quarter, which would be about a 9% increase.  The stock is down about 3% YTD, and flat over a two-year period.  Investors will likely evaluate IBM on cash flow more than earnings until revenue starts to grow meaningfully. Although IBM trades at slightly more than 10x 2014 earnings, shares are still somewhat expensive on cash flow. Shares of IBM are down more than 4% over the past three months, so is this a good time to buy IBM?

By rule, we prefer to buy near support levels when they are tested, because that allows us to maximize our return, but it also helps us control risk, and that is the most important part. Shares of IBM just recently bounced off support, after about an 8% pullback since mid-September.  The stock is currently sitting in the middle of support and resistance, which does not make it an attractive buy ahead of earnings.  Keep an eye on support according to our real time report, and look for a possible re-test if the stock reacts negatively to earnings.

SanDisk Corporation (NASDAQ:SNDK) will be reporting Q3 earnings on Wednesday October 16 after the bell.  Consensus estimates are for EPS of $1.31, which would be an improvement of 173% over the same quarter last year when the company reported $0.48 EPS.  The company has beaten estimates in five of the last six quarters.  The stock is up about 43% YTD and 79% since July 1 of this year.  SanDisk has benefited from high demand for DRAM & NAND chips, as its rival Micron Technology, Inc. (NASDAQ:MU) has as well, both companies have seen big moves up in share price as a result.  Should investors be buying shares of SNDK ahead of earnings?

Right now, SanDisk is in a sweet spot but smart money is watching price.  When smart money sells the stock, as it did recently in shares of Micron, it will likely be done near resistance.  According to the real-time trading report offered by Stock Traders Daily, shares of SNDK are getting close to a test of long-term resistance, and as a rule we are sellers if resistance is tested (it is not there yet).  If the stock does test long-term resistance, and remains below resistance, we would expect a full oscillation to support, that would make it a sell/short at that level too. However, resistance also acts as our risk control, and if resistance breaks higher, bullish signs would surface.

Navigating earnings can be tricky, sometimes investor’s earnings expectations are correct, but the stocks actually do the opposite of what they think it should have done after earnings, so our opinion based on price can help make investors make more well-rounded and sound investment decisions.

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