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Minyanville's T3 Morning Market Call: Markets Work to Shrug Off Weak Apple Earnings

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Netflix was the other big name to report last night, and the company blew consensus estimates out of the water.

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US stock futures pointed to a mostly lower open Thursday, but have bounced off overnight lows and are trying to shrug off weak Apple (NASDAQ:AAPL) earnings. Yesterday the methodical melt-up in the market continued, but short-term momentum traders are scratching their heads a bit as the action has been very selective. Tech and small caps, which are often favorites of momentum traders, are not leading. You are seeing sectors like the banks and transports lead the charge, the latter being a sector intraday traders rarely focus on. Each cycle has different leaders and different groups; you just need to focus on the best set-ups.

During earnings season, I prefer not to own equity in a stock before it reports. If I want to be involved, I generally take a look at some sort of calculated options strategy. Rather than making it a coin flip, I like to construct a favorable risk-reward scenario for myself with risk as premium paid. A paper cut is fine, but a gusher might be too hard to mend.

AAPL is down around $461 this morning, not showing much life heading into the open. The report showed a beat on EPS expectations but fell short on revenues and iPhone sales, two important barometers. The question here is, how much of this gap down gets filled, if any? This will help us judge the trade moving forward. If I do trade AAPL today, I will trade it a level vs. a level as I come in flat. My call spread is worthless, but that's the cost of doing business if you risk $5 to potentially make $20.

Stock is below the $483 pivot, so the next major zone to watch is $440-450. Last night, the after-hours low was $457.30, which we can use as a point of reference. This stock has been for sale for months, exhibiting relative weakness far before the report.

Back in December I was quoted extensively in a Wall Street Journal article: Apple's Halo Cracked.
"The correction was faster and deeper than most traders expected," Scott Redler, chief strategic officer at T3Live.com, said in an email to MarketBeat. Redler has been trading in and out of Apple stock recently. "I think investors are a bit more wary of Apple after that potent sell-off."

"The news today created a perfect storm after technical analysis already pointed to lower prices," Redler says. "Overall it seems the psychology of Apple has changed a bit - the perception is no longer that you can just buy all dips in Apple and close your eyes."

The best scenario for me during earnings season is to see stocks gap up and hold the majority of those gaps. When gaps hold and we get a few days of consolidation at upper levels, it can sometimes lead to another tradable leg higher. By measuring the action in the days following the report, you can potentially tell you a lot about the next trade or trend.

Overall the market continues to do a good job shrugging off AAPL weakness. While we don't like to see leaders fall by the wayside, when other sectors pick up the slack it is healthy in the long-term. As far as levels on the S&P 500 ETF (NYSEARCA:SPY) this morning, micro support is $148.86 then then $148.50, with the 8-day MA sitting at $147.98. Pivot resistance is now $149.50 with the psychological level at $150ish.

Netflix (NASDAQ:NFLX) was the other big name to report last night, and the company blew consensus estimates out of the water. The stock has a 24% short interest, and those shorts are getting squeezed in a big way following the report. The company was expected to lose 13 cents per share this quarter, but instead made 13 cents and guided significantly higher. The stock is up almost 40% after hours and above last year's high. I'd be careful with this one today as it could go either way; shorts could continue to get squeezed, or we could see some of the huge gap filled.

Google (NASDAQ;GOOG) and IBM (NYSE:IBM) reported after the close Tuesday and gapped up and held higher yesterday. These are examples of stocks in which we will watch how the gaps are treated. We like to see some digestion and sideways action to create another potential calculated buying opportunity.

IBM now has a nice gap to trade against as it creates a new range. The pivot low is $203.36 and the pivot high is $208.58. GOOG also a nice gap with a pivot low of $735.79 and pivot high of $749.

Facebook (NASDAQ:FB) had a nice bounce back but isn't that compelling right here.. The stock still acts well overall, and it will be key to see how it handles earnings on January 30. LinkedIn (NYSE:LNKD) is trying to break out, but also might need earnings to break out.

The transports are a sector I am looking at for a potential cute short trade. I don't typically like to short strong stocks or ETFs, but I could look for calculated reversal signals to add to a short in the Transports ETF (NYSEARCA:IYT).



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Scott Redler is long LNKD, GE, WMT, MGM, DBC, CAT. Long AAPL 520 and 525 calls, short AAPL 540 and 550 calls. Short SPY, IYT.
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