Guidewire Software (GWRE), which provides software for the property and casualty industry, reported earnings after the bell today, and the stock jumped on the news after hours. The stock is testing prior daily highs and heading for another high on the year.
The company reported both fiscal third-quarter revenue and operating losses that came in better than analysts' estimates. Revenue rose 20% year over year to $68.3 million. While its GAAP operating loss was $4.4 million (compared with operating income of $4.8 million for the same fiscal period in 2012), non-GAAP net income was $2.6 million, compared with $5.9 million a year earlier. The decrease in profitability was anticipated and was due to investments aimed at longer-term growth.
Guidewire was named by the San Francisco Business Times and the Silicon Valley/San Jose Business Journal as one of the best places to work in the Bay Area in 2013, but is it a great place to invest? If you are talking to anyone who got in on the IPO back in January 2012, the answer would be a resounding "yes!"
Shares of Guidewire opened for trading on the Big Board at $16.75 a share on Jan. 25 of last year, and it was by far one of the best IPOs of the year. This month, it hit a record high of $44.73.
From a technical standpoint, Guidewire will have a struggle on its hands in the weeks ahead. Before the company reported earnings, the daily time frame was showing favor for a buy strategy into Wednesday morning based on a nearly picture-perfect, two-wave correction off highs, in an uptrend, with slowing downside momentum into the afternoon. So what's the problem? Trend placement.
While the daily chart of Guidewire is quite lovely and is a nearly textbook buy strategy as a swing trade, the weekly trend is a textbook example of upside trend exhaustion. This is not exactly what you want to see when planning a buy!
After Guidewire went public, the stock had two swift waves of buying on the weekly time frame .This was followed by a strong technical position trade strategy in the form of a two-wave correction. This correction took place mainly through time as the security formed a cup-with-handle into January of this year.
The handle, or second wave of weekly correction, broke to the upside very quickly. Two more waves of buying have followed. That brings the total to three waves of buying after the larger weekly breakout. More importantly, each corrective move between the waves was of comparable length, lasting four to six weeks. It's a scenario I use when teaching newer traders situations to watch for where your risk for yet another continuation pattern is at its highest.
While the size of the gap created by today's after-hours trading activity severely limits the potential upside continuation on a swing trade, it's still worth watching for a momentum gap trade. I will be monitoring opening price action for strength and trading intraday continuation strategies in the direction of the gap based upon two-to-five-minute time frames. A favorable intraday trend may still create multi-day continuation potential, but I will still remain focused on short-term possibilities and would wait for a larger weekly to monthly correction before establishing a longer-term position.
My verdict? Guidewire may indeed continue to push higher on the daily time frame, but the upside is limited. More likely than not, a trigger on the 90-minute time frame and daily time frame will struggle with prior highs. Even an attempt at a slightly higher high, which is possible given the daily strategy, will face difficulty, and in the weeks ahead we will see Guidewire once again positioning itself for a larger correction on par with the correction that took place throughout the final three quarters of 2012.
Will I be watching Guidewire as a possible multi-day hold? Yes!
Will I be looking to invest (a multi-month hold)? Not at this time.