Veteran traders know all too well that a stock's action is often disconnected with the underlying company's strength. That's not the case with United Technologies Corporation (NYSE:UTX) though - its results last quarter pretty well align (logically) with what we're seeing from a chart of UTX shares. That, however, is the problem... the proverbial red flag.
If you're reading this then you likely already know how UTX fared last quarter, so there's no need to rehash those numbers again. If you're not aware of how the contractor did in Q1, we can sum it up in one word: 'disappointing.' That's not to say its numbers were bad, but they certainly weren't good. That's not the focal point of this look, however. Our focal point is how the shape of the chart is alarming, and one more good bearish nudge could start a selling avalanche for United Technologies.
Old-school, purely-fundamental investors may scoff at the idea, but the fact of the matter is, charts DO matter... at least for anyone who will eventually have to sell a stock. Charts DO offer an insight into what's apt to be in store for a stock. So, studying UTX from a technical perspective is worth a few seconds of time. More specifically, studying the market's response to today's earnings news from United Technologies Corporation is worth a few seconds of time.
First and foremost, the near-1.0% dip today confirms the market didn't like last quarter's numbers. No surprises there. What is interesting - and telling - is that the market wasn't planning on liking the numbers no matter what.
Take a look at the trading action from United Technologies a week and a half ago. Shares peaked in the second week of April (with a move that would easily qualify as 'overheated') only to pull back over the course of most of last week and the latter part of the week before that. It was no small pullback either - the market was desperate to shed UTX before earnings were released. You'll also notice that most of those selloff days were on higher volume. That's red flag #2.
Still, what should be most worrisome to traders is something we've only seen a hint of so far.
Though shares traded above it briefly on Monday and a little today, the 20-day moving average line (blue) has staved off any rebound attempt. And, though UTX managed to move back above the key 50-day moving average line (purple) late last week, the sellers have managed to point the stock towards it again. If United Technologies Corporation shares continue on their current trajectory, they'll cross under and close under the 50-day moving average line at 92.18 today (the stock's current price is 92.60, and falling). And if that happens, it'll be the kiss of death. The stock's already overbought thanks to Q1's runup, so as vulnerable as shares are to profit-taking, that first post-earnings close under the 50-day moving average line is apt to be the beginning of a technical implosion. Tread lightly.
If you want further updates or warnings about stocks you know and trade, then sign up for the free SmallCap Network newsletter today.