Homing in on Best Pattern Stocks to Buy While Still in Earnings Season

Tom Gentile

Posted in
Options Trading

By: Tom Gentile
August 18th, 2023

6 mins read

The markets have been trading lower a bit lately, The Dow Jones Industrial Average’s recent peak was 14-trading days ago.

 The NASDAQ closed lower for the 4th day in a row and extended one if its longest weekly losing streaks in quite a while.

Now, in what seems like the blink of an eye, the narrative has shifted to downgrades from the lips of analysts. As we round the corner to another summer, are there any bullish opportunities left in this earnings cycle?

Well, I have data that suggests there is, and I want to show you how we are playing it.

Not only have I provided you this article of education, but I have a video for you to watch where I cover in detail much of what is written here.

How Fast Things can Change in the Markets

It’s amazing what can happen in just a few weeks.  From memorial day through July, the market put in one of its summers nicest runs on record, racking up 12% during that time frame.  Sectors such as commodities, financials, and tech stocks all lead the market to new YTD highs.

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Figure 1: Candle Chart with 30-60day ATM IV and Fibonacci Retracement Tool on SPY

So why the big turnabout in the last 2 weeks?  It all started in the beginning of August when credit analyst Fitch downgraded the US Debt from AAA to AA+ citing in their words “a steady deterioration in standards of governance”.  Add in some companies with not so stellar future guidance, and most recently Fitch’s encore appearance downgrading the banking sector, and this time not just the regionals, but names such as JP Morgan.

Earnings Season Isn’t Over Yet

Smells like a big pullback when you look at a 90-day chart, but this only represents about 3% pullback from the most recent highs.  Although if you check out my video from the beginning of August, than you know it’s a tossup month seasonally.  That means over the last 10 years, there is a mix of bullish and bearish days for the most popular stocks.  

Where can I go to find stocks that have the most likelihood of moving higher, with the least amount of risk? Let’s go somewhere that everyone has brushed aside – the remainder of earnings season.  

I have been a big believer in following the patterns. Though there’s no guarantee that patterns are 100% foolproof, I want to show you a few that are hitting my radar right now.  Let’s start with a tech giant that reports on the backside of the earnings cycle: Oracle (ORCL).   

Now I could sit here and dazzle you with product announcements, revenue, and earnings growth, even some fundamental analysis, but I will leave that to the long-term investors.  I am merely spotting a short-term pattern with this stock.  Check this out:

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Figure 2: Candle Chart on ORCL over past 4 Earnings Reports

I know it might be hard to see, but for the last 4 quarters, traders have driven up the price of ORCL around 5 points BEFORE earnings are even announced.

What’s interesting as well is what happens after earnings.  In each of the last 4 quarters, ORCL has reported better than expected earnings, though the price action afterwards was a tossup.  Sometimes it moved higher, sometimes lower.  

Where is the consistency with this stock?  Well, when it comes to patterns the consistency is before earnings.  If the average move a week prior to earnings was around 5 points, this represents a stock move of 6% give or take.  What I mean is that the stock buyer had an average 6% profit buying the stock a week before earnings and selling it the day of earnings, making sure they were out of the stock prior to the report.  

Not a bad profit in a short time, but you still had to carry the stock for a week or so.  What alternative can we trade in place of position trading the stock?  

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Figure 3: ORCL IV Spikes Going in to Earnings

This is a chart of ORCL options implied volatility.  Same time frame, same earnings, but look at the swings of options premium in volatility.

Buying Call options, a week or so prior to earnings and selling right before the report looks like the right way to trade this pattern.  If we would have done this over the last 4 earnings cycles, how would buying the short term near money call options fared?  

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Figure 4: Last 4 ORCL Options Performance Prior to Those Earnings Reports

ORCL is 4 for 4 when it comes to buying call options and selling them a week later.  Look at the returns.

The last pattern saw a 378% rise in the June 109 calls, starting at 2.08 and ending at 9.95.

5 Stocks on my Remainder of Summer Watchlist

One can see with Oracle, the idea would be to buy the stock or near money options a week before the upcoming earnings report, which is scheduled for Sept 11th. We obviously want to close this trade out win, lose, or draw before the earnings report. What else is on my watchlist for the rest of summer?

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Figure 5: 5 Stocks on My Bullish Pre-Earnings Watchlist

My top bullish earnings pics heading into September include Lowes, which has a 100% accuracy over the last year and an average ROI on the options was near 120%.  Zscaler, Marvell, and Salesforce round out the top 5, though they only have a 3–4-win rate over the year.  

Remember, a plan is always better than none at all…  Even when it comes to earnings… So, what about the Bearish patterns?  Join me next week as I dive into the best bearish opportunities into the end of summer.  

Enjoy the video and the education and be well options traders.

— Tom Gentile
America’s Pattern Trader

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