Earnings Edge: A Pivotal Week for 2 Stocks (CSCO & AMAT Analysis)

Earnings Edge: A Pivotal Week for 2 Stocks (CSCO & AMAT Analysis)

We are coming up on the tail end of the second-quarter earnings season, and so far, it’s done pretty well.

The companies in the S&P 500 are reporting the highest revenue growth in more than a decade.

That tells us the rebound from the pandemic is alive and well. Just keep in mind this is backward-looking data. Meaning it is a current picture of the economy but tells us how companies did for the second quarter of 2021 — from April to June.

July, August and the rest of the year could be totally different.

With worries rising again about the virus, companies are starting to get worried. And it’s showing up in the first place that would be impacted — airlines.

Frontier Airlines and Southwest warned that they see weaker bookings and higher cancellations due to rising case numbers.

This could be the start of a weak fall economy for the country, and stocks are not pricing it in at all yet. Companies are still riding high the bounce back our economy has experienced from the first economic lockdowns.

Earnings will continue to play a key role, that’s where companies are warning of the weakness they are seeing.

One thing is for sure, expect more volatility in the markets. For options traders, it’s great news. It means there will be plenty of opportunities to the upside and downside that we can take advantage of.

To stay on top of the latest swings in the market that are tradeable, be sure to sign up for my True Options Masters daily letter. You won’t find better content anywhere else when it comes to trading options, I guarantee it.

Now let’s dive into today’s Earnings Edge that features two stocks on the verge of making a big move — Cisco Systems Inc. (Nasdaq: CSCO) and Applied Materials Inc. (Nasdaq: AMAT).

Earnings Edge Stock No. 1: Cisco Systems Inc. (Nasdaq: CSCO)

Earnings Announcement Date: Wednesday, after the close.

Expectations: Earnings at $0.83 per share. Revenue at $13 billion.

Average Analyst Rating: Outperform

As we head into more economic uncertainty, fundamentals play less of a factor, and simple price action will take over.

That’s because we are trading more on fears and expectations than anything the company is doing behind the scenes. And that will be true even for companies like Cisco Systems, which is an internet networking giant.

It hasbenefited from selling a lot of office-focused equipment, but with companies staying with the at-home movement for longer than expected, there’s a lot more competition for cloud-based platforms.

On top of that, the more companies are concerned about the economy, the less likely they are to spend money to upgrade their existing infrastructure. This is all a wild card of knock-on effects that can take place.

It won’t show up in earnings this week, but any hint at larger issues and investors could easily panic.

CSCO has been trading in a rising wedge pattern, where we have a rising support and a rising resistance line.

CSCO’s Earnings Pivotal to Break Wedge

csco wedge

This doesn’t go on forever. We know the two key levels to watch, and a big move this week on earnings could easily breakout above or below that pattern.

Based on my Profit Trigger that I use in my service, if we get an earnings beat of at least 5% and the stock jumps 5% or more on the news, expect the breakout to be to the upside.

Outside of that, you have the key levels to watch. I don’t care if CSCO is missing earnings big time. A breakout to the upside is still worth jumping in on. And we already know it can play out the same on the downside as well.

Look for earnings this week to break out of that rising wedge pattern for the stock.

Earnings Edge Stock No. 2: Applied Materials Inc. (Nasdaq: AMAT)

Earnings Announcement Date: Thursday, after the close.

Expectations: Earnings at $1.78 per share. Revenue at $5.9 billion.

Average Analyst Rating: Outperform

Applied Materials provides equipment and services to tech-related industries. While it faces the same issues as above, AMAT is trading in one of my favorite price patterns — the ascending triangle.

We have a clear horizontal line of resistance in red, just above $140 a share. But there’s rising support showing that buyers are picking up the stock at higher and higher prices. In other words, they are not willing to wait for a bigger dip.

AMAT’s Pattern Generally Breaks Upwards

amat breaks upwards

It’s a bullish price chart that tends to lead to an upside breakout.

The reason it is one of my favorites is because of the expected move it tells us. You simply take the height of the pattern, from bottom to top (which is $37 per share in this case), and add it to the point of the breakout.

If AMAT breaks out, up or down, we are looking for a quick 25% move.

The trick is getting the direction right.

Based on the pattern, I’m looking for an upside breakout from here. But that is not a bet I’d be willing to place. Instead, the smart money waits on the initial breakout, then rides the rest of the expected move.

So keep a close eye on this one after earnings this week, and if we get a clear trend break, you know which way AMAT will be heading from there.


Chad Shoop is a Chartered Market Technician and options expert for Banyan Hill Publishing. He is the editor of three leading newsletters: Quick Hit ProfitsAutomatic Profits Alert and Pure Income. His content is frequently published on Investopedia and Seeking Alpha. Check out his YouTube Channel to see his latest market insights.

Click here to join True Options Masters.

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