The set-up: At the end of last week, three big banks reported disappointing earnings. JPMorgan Chase (JPM), Citigroup (C) and WQells Fargo & Co. (WFC) all came in with reports that sent their stock prices lower, despite beating earnings per share estimates.

The thing is, with the stock market going seemingly straight up, most big companies are expected to beat earnings per share.

To learn more about what stock prices will do as a result of an earnings report, you’re going to have to dig further into profits, revenues, outlook and guidance. Keep in mind, too, that through earnings season, it can be much safer to play options on ETFs than to trade in the individual stocks.

My take on it: I wasn’t surprised by these earnings disappointments; the Palm Beach Research Group recently noted that bank loans are down over 2% this year, and the last time they had declined by that much was three months prior to the start of the Financial Crisis of 2008. I’m not saying that will happen again, but it is a reminder that one outcome of that crisis was that the federal government had to bail out the big banks.

Bank of America and Goldman Sachs — two more banking mega-caps — report earnings Tuesday morning. At the moment, I’m expecting them, based on their fundamentals, to do the same things that JPM, WFC and C did.

We’re in a pretty green market here. Playing red-to-green moves (buying low and selling high in a strong market) can be a great short-term trading opportunity. On Friday alone, I alerted my members to Finacial Select Sector SPDR (XLF) calls (one member reported a $500 profit in less than an hour as a result), and I’ll be looking to do the same thing tomorrow, with XLF calls on a red to green move.

I’m likely to go with a shorter-term expiration and wait for confirmation that they’re actually going red to green here. I’ll need to see what my options chain looks like upon market open before pricing and doing the math on an option, but my expiration date would likely be 7/28.

What I’m looking for/how I’ll play it: To enter this trade, I want to see a confirmed bounce and hold off of the 50-day simple moving average (currently $24.64), which can be seen via an inverse head-and-shoulders chart pattern. I would look to take profits on XLF calls if I get up by 10 percent or more, and I’d stop out if XLF broke the 50-day simple moving average.

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Davis Martin is the head trader at Dailyprofitmachine.com. He trades SPY Calls and Puts and swing trades mid- and large-cap stocks and stock options. He has no shares, options or open orders on anything related to the financial sector but will be watching it closely this week, planning to trade Tuesday in XLF options if the market moves in accordance with this commentary.

Author: Davis Martin

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