In this article:

• Oh, Snap, what a rough day for tech
• Banks not boosting market upturn
• Energy sector burning faster

And the earnings whirlwind continues.

Technology company hotshot Snap, Inc., (SNAP) tanked 39% following a negative earnings report, Twitter (TWTR) fell off its perch, and the Nasdaq sank lower as the stock market rally ended with all three major indexes posting losses to close out the week.

With earnings season picking up speed and each report a coin toss, any sustained upside move is in question and Simpler’s traders are analyzing a path ahead.

Technology tickers take a tumble

The technology sector did not fare well on Friday, and it faces more trouble next week with a potential higher interest rate hike from the Federal Reserve (Fed) that seems to trip up technology stocks.

Simpler’s traders are eyeing this “tech storm” for opportunities for short side moves across the sector.

Pandemic darlings Meta (Facebook), Netflix, and Twitter fell back to earth this year after growing too extended during 2020 and 2021. Netflix enjoyed a positive twist even after a poor earnings report this week.

Twitter fell after its poor earnings report today, and next week could be a fiery mix with some of the largest technology companies, such as Apple and Amazon, reporting earnings.

Simpler’s traders are watching for daily squeeze opportunities, and whether any of the technology companies break levels and flush further. Consider targeting tickers possibly looking to retest the lows and then break through.

Snap, as mentioned above, collapsed 39.08% from the previous session to close at $9.96 today. This is an example of failing tech prices to watch going forward.

Snap, with its flagship app Snapchat, released second quarter earnings on Thursday and the price dropped 26% after-hours, making a new low at $11.10. Snap is facing industry headwinds due to a declining digital ad market (this is happening across the board) and quarterly sales stalled in the slowest growth pace in over four years.

The social network ticker has been volatile over several previous quarters. One quarter it is up by double-digit percentage points after being down double-digit percentage points.

This wild card may be the extreme in earnings fluctuations across the technology sector, but it can show how volatile technology can get in current market conditions after being a bellwether of stability during the pandemic.

In the market today, the Dow closed at 31,899.29 points to drop .43% (losing 137.61 points on the day). The Nasdaq dropped to 11,834.11 points for a 1.87% tumble while the S&P 500 lost .93% to 3,961.63 points.

As mentioned earlier, technology stocks struggled today after negative earnings reports in Snap and Twitter. The technology-laden Nasdaq is now down 24.36% on the year; the Dow down 12.22%; and the S&P 500 down 16.88%.

Banks not contributing to market upturn

Major banks have already reported earnings and other banks will release second quarter reports over the coming weeks.

Banking companies such as Citigroup, JPMorgan Chase, Wells Fargo, and Morgan Stanley tend to regulate the performance of the financial sector. Despite boosts when the big banks reported positive earnings, the financial sector hasn’t been able to push the market heavily in a bullish direction.

Citigroup (C) second-quarter earnings report topped analysts’ estimates and the stock closed at $51.91 on Friday (down 1.29% after a slight lift following earnings). JPMorgan Chase, Wells Fargo, and Morgan Stanley all closed with lower stock prices on Friday.

Of the four larger banks that have already reported, only Citigroup matched or exceeded expectations for revenue. The others fell short from a combination of missed revenue, bad loans, and stock buyback plans. All these major banks’ stock is down for the year.

Overall the banking sector outlook remains bearish.

Simpler’s traders are watching how earnings reports will affect the inverted yield curve, particularly in long-term bond yields. The inverted yield curve is the relationship between two-year and 10-year treasury bonds.

First-quarter news headlines were significantly more negative than in previous quarters which has caused investor sentiment to maintain a cautious stance for the second quarter earnings season. Mixed in are continued concerns about the economy, inflation, supply chain, politics, fuels prices, and war in Europe.

In particular, an area of focus is the inverse relationship between interest rates and technology (which can affect banks). In the past when the 10-year yield shot higher – which resulted in technology breaking lower – this resulted in the technology-laden Nasdaq breaking below key support.

More weakness in transportation sector?

A market sector that the team at Simpler Trading regularly follows is the transportation sector.

This sector often provides short setups to the downside as earnings reports signal weakness in transportation operations. Airlines are of particular interest.

The Boeing Co., which has struggled for several years, has moved higher in price the last month but is still considerably down from the first quarter. This makes it difficult to imagine their situation improving significantly in the near future considering rising costs such as fuel.

Boeing – expected to release earnings before the market opens on Wednesday – is an American-multinational corporation that designs, manufactures, and sells airplanes, rotorcraft, rockets, satellites, telecommunications equipment, and missiles worldwide. 

Boeing has previously called attention to global geopolitical concerns causing slowdowns or cancellations in pending orders. Key cancellations have occurred with Ukraine and Russia airlines.

With current downside movement in the transportation sector, traders are not confident Boeing will counter further more moves to the downside following earnings.

This makes trading short on Boeing potentially viable considering how Boeing stock tends to drop prior to earnings. Boeing closed at $158.16 today, down 2%.

With just a few days until Boeing reports earnings, traders are watching for a squeeze setting up with a possible downside target.

Boeing has beaten earnings estimates less than half the time over the last nine quarters – not a strong showing.

Simpler’s traders are cautious with options plays on Boeing and are taking a risk-controlled approach that may include a spread.

Transports, in general, have been dangling precariously near a cliff. Traders may see an even further move to the downside.

Energy sector is a hot mess

The energy sector, which has been the relative strength sector, has become a sector full of warning signs that traders are watching.

Crude oil has struggled to maintain key support levels for months, even at times showing some moving average crosses as crude trades below resistance. With crude hovering below the $100 price point, which is a key psychological value, it’s not unreasonable to estimate that crude could fall further and push the energy sector down as well.

With the market in a downtrend and failing to sustain extended upside movement, any move higher in energy would likely help the market. Energy has been expected to remain the relative strength sector, but it may be on shaky ground.

This is a sector to watch closely.

How do you trade poor earnings?

With all the negative reports, how do traders find setups around these earnings releases?

Simpler’s traders have some default setups – sell call-credit-spreads or sell calls. Traders could also place butterflies with a downside target.

The caution is that during earnings season – as reports are released – setups can get tricky and traders must plan for total risk of capital involved.

Traders would generally be wise to avoid a butterfly spread in the same week of earnings. But, like any trade setup – selling calls, buying puts, buying a put butterfly – the focus is to find the setup first and then decide if the risk is acceptable.

This quarter the indices could possibly test the lows as earnings season rolls on and take much of the market down with them. Pay close attention to key support zones in the indexes this earnings season.

All three indices are struggling, as shown by the gap down on Friday.

Consumers cutting back hits market

Many factors are affecting this market, both in the U.S. and abroad.

U.S. consumers – whose spending and financial health can be traced through the discretionary sector – are hurting. And with rising inflation, consumers are not spending as much as expected.

When traders take a look at data that relates to inflation, definitely the discretionary sector is a major area that will be impacted. When consumers cut back, they choose to cut back on discretionary purchases.

This in turn affects stocks in the discretionary sector. The way discretionary has been breaking down suggests it could push further to the downside.

Current market conditions suggest that there doesn’t appear to be any sector in particular that has the strength to bring the overall market substantially higher.
Traders should consider all these market factors when searching for trades as earnings season rolls on.