Price Leads Fundamentals

As a technician, I believe that price action leads fundamentals, and news in general. Since price represents the forward looking expectations of market participants, the actual news is often discounted ahead of time.

There are a lot of examples of this occuring every day, but this week two big names experienced this.

First up, LinkedIn. LNKD was down 19% on Friday after reporting poor earnings after the close Thursday. Weak price action suggessted a less than stellar earnings report may have been ahead.

On an absolute basis, after gapping higher in February, its bullish consolidation pattern resolved to the downside and prices failed to hold above the 2013 highs. When a consolidation fails to resolve in the direction of the underlying trend and price can’t reclaim a key technical level (the ’13 highs), it shows that sellers are in control until that overhead supply gets taken out.

lnkdOn a relative basis, LNKD began to underperform both the Social Media ETF (SOCL) and Dow Jones Internet Index ETF (FDN) in February, and continued to until Friday’s massive gap down (not shown below).

prophet

The next example is Apple, whose chart gave us some clues that the risk/reward into its earnings release after the bell on 4/27 was not favorable on the long side.

1. Prices rallied roughly 7% in the 8 trading days leading up the event.

2. Prices ran into the YTD highs and had no time to consolidate before breaking above on the earnings gap. To me, this put into question the sustainability of any rally that did result from an earnings beat.

3. From a sentiment perspective, anecdotally, it seemed everyone was expecting a big beat.

aaplThe result was that, despite a seemingly blowout quarter, the stock gapped higher the following session and faded all day. This is a classic example of a “sell the news” event, where the majority of market participants who wanted to buy the stock, already owned it into the report.

The Bottom Line: It’s impossible to know exactly what is or isn’t discounted in a security, but it is possible to utilize clues in price action, momentum, and sentiment to identify where the risk/reward may not be optimal. If either of these stocks had exploded to new highs like Netflix and Amazon did a few weeks ago, that’s fine. For me, I’m comfortable missing moves in names where the setup doesn’t fit my process.

As always, if you have any questions feel free to reach out and I’ll get back to you as soon as I can.

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