IBM Quick Lessons in Multiple Timeframes, Divergences, and Earnings

Oct 18, 2011: 9:34 AM CST

Wow – if you missed the post-market action in IBM’s earnings announcement, you missed a huge move that took so many traders by surprise.

While this post will focus mainly on key lessons from the charts, it’s worth noting that trading around earnings increases risk, especially if a stock’s earnings differ greatly from what’s expected… or even in IBM’s case, when earnings are different by mere pennies from expectations ($3.19 reported versus $3.22 expected).

Let’s focus our attention on two main lessons – that of higher timeframe analysis and the massive multi-swing negative divergence that undercut the recent rally.

Let’s start with the “Over-extended” Weekly Chart:

Let me just focus on two things on the chart above:

  • A Rising Primary/Long-Term Trend
  • The Two Recent Closes (spikes) through the Upper Bollinger Band

When doing analysis or finding candidates to swing trade, it’s often best to start with the higher timeframe charts and work down from there.

Let’s focus on the two spikes above the upper weekly Bollinger Band – this simply indicates the stock is “over-extended” and generally more likely to fall in the immediate (next) move than rise.

As we look at the lower timeframe charts, keep in mind that price was “over-extended” above its upper Bollinger Band into $190.

This simply suggested it was NOT the time to get long IBM shares – and for very aggressive traders, it might be an opportunity to short-sale (or buy put options) if the lower timeframe charts showed bearish patterns/signals.

With that, let’s drop to the popular Daily Chart:

The Daily Chart steps us inside both instances where price over-extended above the weekly Bollinger Band.

The main thing to note on the Daily Chart is the power-rally into $190 which was undercut by a persistent negative volume divergence.  On each day of higher prices in October, volume was a little bit lower – volume divergences tend to precede reversals.

Ok – so we have the weekly chart showing a poke outside the upper Bollinger and the Daily Chart also showing an over-extended rally that is being undercut (non-confirmed) by declining volume.

Again, this is NOT a situation that would compel a long (buy) trade, but instead would have aggressive traders taking the timeframes even lower to see if a potential short-sale opportunity triggered.

Let’s see two intraday timeframe charts, starting with the 30-min structure:

I mentioned the negative volume divergence on the Daily Chart, but the 30-min chart makes the divergence abundantly clear – that’s one of the benefits of multi-timeframe analysis (the lower timeframes clarify the picture – or reveal more information than the higher frames).

I’m now adding the 3/10 Momentum Oscillator to the chart to get a sense of what Momentum reveals about the price swing in motion – momentum declines steadily (along with volume) as price continues its rally higher.

The 30-min chart reveals clearer negative Volume and Momentum divergences into an over-extended situation on the higher timeframes – once again, NOT a compelling spot to plan a buy trade.

Let’s see if the 15-min chart shows us a potential short-sale opportunity:

The 15-min chart is basically the same as the 30-min intraday chart with one big exception:

Price broke and closed under the 20/50 EMA structure early on October 17th, and then these EMAs crossed “Bearishly” later in the session.

Price then rallied INTO the EMA Crossover (what I call the “Cradle Trade”) into $188 just ahead of the close… ahead of the earnings report.

This sets up a “Make or Break” situation where price either continues its breakdown lower – in conjunction with a typical sell-swing as suggested by the higher timeframes – or otherwise does the ‘unexpected’ or lower-probability outcome with a firm breakthrough higher above $190 which would target $200.

The outcome this time was the expected or probable thesis:

Price had greater odds of falling/declining due to the higher timeframe “over-extended” rallies above the upper Bollinger Bands which was under-cut by negative volume and momentum divergences on the intraday/lower frames.

From that thesis, price gave a set-up or short-sale trigger on October 17th via breakdowns of rising trendlines and rising EMAs – along with an EMA cross-over (all of which were potential trade entry triggers).

The stop would go above $188 (tight) or preferably $190 depending on your risk tolerance.

To summarize, the main/quick lessons to learn from this situation are the following:

  • Weekly Spike through the Upper Bollinger (over-extended)
  • Daily Power-Rally on Declining Volume Each Day
  • Intraday Multi-Swing Negative Momentum and Volume Divergences (clarified)
  • 15-min EMA Cross-overs and Trade Triggers

Take time to learn the lessons from situations like these, as these lessons will repeat into the future on other stocks and markets… just the end-result won’t likely be such a sudden over-night resolution thanks to an earnings announcement to get the downward ball rolling.

Corey Rosenbloom, CMT
Afraid to

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7 Responses to “IBM Quick Lessons in Multiple Timeframes, Divergences, and Earnings”

  1. Tuesday links: TIPS time | Abnormal Returns Says:

    […] A look at IBM ($IBM) on a number of time frames.  (Afraid to Trade) […]

  2. sandew Says:

    All well said post the event, but, how do you anticipate when to open short, is the question

  3. Corey Rosenbloom, CMT Says:

    Personally, I'm not big on trading right ahead of any earnings announcement, but I know traders who do quite well, which is why I wanted to highlight this situation.

    If earnings weren't after the close – or even if they are (it's just more risky than normal) – the short-sale (or buy put) entry was VERY aggressively shorting into $190 (tightest stop) otherwise the safer shorts were around $188.50 on the early break of the 20/50 EMA on 15-min chart or otherwise on the “Cradle Trade” rally into $188 from the underside AFTER the 20/50 EMAs crossed (again, tight stop).

    The main idea is to get the bigger picture right and not worry too much about perfection in execution – there's usually two or three ideal entries into a situation like this depending on your risk tolerance.

    Were this not an earnings-specific event, we would have expected price to drift lower over the next few days, but the earnings event achieved initial targets right off the gap open.

  4. Dominick Says:

    Great analysis Corey,  I take it even if you came late to the party and missed all this you could still find a nice trade based off the gap down and the new momentum low.

  5. Tripk Says:

    thx Corey, great lesson!

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