While reactions to this morning's big-caps reporting earnings have been mildly positive, last night's reports were met with disappointment. It will be interesting to see if the trend continues tonight when we hear from big names such as Intel (INTC), VMware (VMW), Yahoo! (YHOO) and Intuitive Surgical (ISRG). If the past is any guide, two of these four will be disappointing and one "meh."
I hesitate including YHOO in the list due to the chatter about bids as it creates a put under the stock, so putting YHOO aside, I expect two of these three names to disappoint tonight if the trends of the past few earnings seasons are to continue. That's not great news for companies reporting tomorrow night as well, but one night does not make a trend, so we'll see how these do tonight. I only have interest in VMW and ISRG at the moment as I view them with the clearest target points.
ISRG has been on a tear since the February low, rising some $125. This uptrend line is pretty clear on the charts and April has formed a small ascending triangle. The majority of triangles break the horizontal line, so if one is focused solely on price, then the expectation is a higher move. Given that ISRG has no resistance above the $630 level, shorts could be in a real bind.
The upside expectation priced into options is around $660 a share, but without any other resistance, this makes the upside target a somewhat tough call; however, it does indicate being short calls is a riskier-than-normal bet into earnings. Downside expectations point to $590. I would note there is support from the previous March breakout that coincides with this downside target, giving us a solid target. Additional downside targets measure to $575.
If one considers trading short put spreads, vertical spreads, butterflies or ratio put spreads, then $590 and $575 are the two numbers I would craft my trades around into earnings. ISRG has shown some tendency to fade after day one or two, so I wouldn't want to be a buyer tomorrow on a drop, but if the stock is in the $575 area come Thursday morning, then this may make an interesting recovery play. Finally, I would note the divergence between the bullish price setup and the bearish crossover in the moving average convergence/divergence (MACD) and Full Stochastics. It's a yellow flag for me into earnings.
VMW has struggled in 2016, but if I am optimistic about upside potential of the names reporting tonight, it may be the worst performer of the group. There's been concern, with much of it hinging on Dell's purchase of EMC (EMC), but VMW has a tight coil into earnings and a past littered with big moves. The recent bullish flag only needs a push above $52 to trigger and a move over $53 sets us up for a quick pop to $56 as I can see more potential for escape velocity on the bullish side.
Options are pricing in a move around $4.30 into tonight's number, which provides for an upside target of $56.25 and a downside number of around $47.75. Both of these align well with recent price patterns. The downside view in VMW holds more support levels than the upside resistance levels. I can see support at $49, $48 and $46. I would be more comfortable with ratio put spreads or far out-of-the-money bullish put spreads on this name.
The technical picture on VMW is one of consolidation in the longer trend, but bullish in terms of momentum and volume. If I were going to take a short on the bullish side, it would be in VMW tonight.