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Profit-Taking May Set Up Further Upside

John Jagerson and Wade Hansen

To say that many traders have been disappointed by Wall Street’s lackluster response to the incredibly strong earnings results corporate America has posted for the first quarter of 2018 would be a massive understatement.

According to FactSet, a full 78% of the S&P 500 companies that have reported first-quarter earnings to date have beaten their earnings-per-share (EPS) consensus estimates. If that level holds, it will be the highest level FactSet has seen since the firm first began tracking the metric in the third quarter of 2008.

With numbers like that, you would probably expect the stock market to be soaring higher. Unfortunately, other economic and geopolitical risk factors — like a potential trade war with China, heightened tensions in the Middle East and the accelerating wind down of the Federal Reserve’s balance sheet — have kept the S&P 500 from breaking out of the long-term “triangle” pattern it has been consolidating in for the last few months (see Fig. 1).

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Fig. 1 — Triangle Consolidation Pattern on the S&P 500

While this stagnation in the S&P 500 has been frustrating for those who have been looking for a bullish breakout, it is also encouraging for those who have been fearing a bearish collapse. Yes, wary traders have been taking profits off of the table by selling into strength as companies have reported strong earnings, but other traders have been swooping in to buy those same stocks at slight discounts as the profit-taking impulse has waned. This is good news for the future.

Seeing this stability in the S&P 500 tells us that if the economic and geopolitical risk factors traders are currently concerned with fail to materialize in the short term, bullish traders may become increasingly willing to jump back into stocks if earnings expectations remain high.

The Bottom Line

According to FactSet, analysts are projecting earnings growth of 19.2% for 2018. These bullish expectations, combined with the positive response we are seeing in the energy sector to rising oil prices and in the financial sector to rising yields, should provide strong support to the market and potentially set it up for a short-term breakout to the upside.

You can learn more about identifying price patterns and using them to project how far you think a stock is going to move in our Advanced Technical Analysis Program.

InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next SlingShot Trader trade and get 1 free month today by clicking here.

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