There are many things I look for when a stock approaches its earnings release, but volatility-squeeze setups are probably my favorite. ServiceNow (NOW) reports earnings on April 20 and has that look about it now.
The stock has bounced up by some $16 a share over the past two months after being cut in half to start the year. If we weren't close to ServiceNow's earnings report, I'd be looking for an upside play here.
In fact, I'd still consider a slant in that direction even heading into earnings, based solely on the stock's technical setup. From a pure earnings standpoint, NOW seems pointed to put in gains in the $10-12 range, or 15-17%:
The key focus here is the stock's recent price action, where we've seen a sideways move for the better part of the past month. This has created a situation where the eight- and 21-day simple moving averages have converged.
Furthermore, we've seen the Bollinger Bands constrict to their smallest width since the start of 2016 prior to NOW's last big drop. The Bollinger Bands have also narrowed to within the limits of a tighter Keltner Channel, which is often a sign of a forthcoming volatility squeeze.
These are key components to look for when scanning for a stock that seems set to potentially move more than expected based on an earnings report or other catalyst.
As far as why I'm leaning bullish on NOW, that's due to longer-term aspects of the stock's secondary indicators in addition to its short-term indicators. First, we have the Full Stochastics crossing bullish again and moving over the 50 midline.
Second, we have the eight-day SMA above the 21-day SMA. I have a minor concern that they're close in nature. However, I view this more as part of the squeeze rather than as something bearish.
The longer-term MACD here is bullish and still trending higher. I'd like to see the histogram expand, but I think this is just another sign of consolidation and doesn't change the stock's bullish nature.
Lastly, the Stochastics RSI here is very bullish and trading well above the 50-day SMA. The 50-day SMA is also trending higher, and owning this stock when its StochRSI is trending upward and above the 50-day SMA has been very profitable in the past. (Being short or neutral when the StochRSI is under the 50-day SMA and trending lower has also worked out as well.)
The bottom line: Buying ServiceNow here looks like an attractive, bullish pre-earnings trade. But I would move more toward volatility into earnings, especially if the stock price remains in this tight Bollinger Band pattern.
Every company offers a unique look heading into earnings. But this setup has potential in terms of volatility should ServiceNow hold a similar look heading into April 20.