Do These 2 Stocks Present Buying Opportunities Ahead of Earnings?

There are compelling bullish arguments for Home Depot Inc (NYSE:HD) and Activision Blizzard, Inc. (NASDAQ:ATVI) ahead of earnings

by Josh Selway

Published on Feb 5, 2016 at 11:55 AM
Updated on Jun 24, 2020 at 10:16 AM

Each week, Schaeffer's Senior Quantitative Analyst Rocky White compiles a list of stocks that have pulled back to levels that have previously sparked rallies. This week, two names that stood out were home improvement retailer Home Depot Inc (NYSE:HD) and video game giant Activision Blizzard, Inc. (NASDAQ:ATVI). Both of these stocks have pulled back to their 160-day moving averages ahead of their earnings reports later this month. Let's take a closer look at HD and ATVI below. 

Although HD has cooled in recent months, its long-term technical performance remains impressive. Year-over-year, the shares have added over 9%, hitting a record high of $135.47 in November. Today the shares are off 1.7% at $119, but if they can bounce from their 160-day trendline the same way they have in the past, there may be nothing to worry about.

Specifically, the stock has hit this level on eight previous occasions over the past three years, and each time it's posted gains in the subsequent 21 days, averaging an increase of 4.5%. Also, HD remains safely within the $115-$120 area, which has contained its previous pullbacks since mid-July. 

160205HD

As mentioned, Home Depot Inc is scheduled to report earnings later this month, before the open on Tuesday, Feb. 23. It's interesting to note that short sellers have been fleeing the scene ahead of this event. In fact, short interest fell by over 48% during the two most recent reporting periods. Maybe these traders recall HD's previous post-earnings performances. Specifically, the shares have moved higher in the sessions following six of the company's last eight quarterly reports. 

ATVI is also sliding today, giving back 3.5% at $30.81. Regardless, the shares' 12-month advance comes in at 39.3%, and it too hit an all-time high near the end of 2015. And with the 160-day moving average again in play, traders should know that the stock's posted gains 80% of the time it's hit this level, based on a 21-day timeline. The average gains stand at a striking 8.2%. The $30 level is also worth monitoring. Aside from serving as a nice round-number level, it briefly marked the stock's post-bull-gap high in late August, and contained a subsequent pullback after its next leg upward.

160205ATVI22

Activision Blizzard, Inc.'s fourth-quarter earnings release is slated for after the close next Thursday, Feb. 11, and if history is any guide, buying the stock ahead of the event may not be a bad idea. Going back eight quarters, ATVI has posted a positive post-earnings performances every time, with an average gain of 6.5%.

Making the situation that much more enticing, from a contrarian viewpoint, is the bearish trading pattern recently witnessed among speculators. Specifically, the video game stock's 10-day put/call volume ratio at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) comes in at 0.84, which is just 7 percentage points from an annual bearish high. An unwinding of these positions could result in tailwinds.

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