We're Right in the Thick of 2018's Biggest Profit Opportunities

What could be better? We're now in the first full week of the season, with 62 S&P 500 companies on the docket.

This is a critical season that I believe takes on more significance than most. That's because the market itself is at a critical juncture - a tipping point, if you will.

The bulls and bears are in a monster tug-of-war over the market's direction during the next few months, and, naturally, earnings could be the factor that tips the scale one way or the other.

I couldn't be more fired up about the next few days - and you will be, too, once you see this...

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Here's Why We're at a True Tipping Point

In this big battle, the bulls have the 200-day moving average on their side, which provided a veritable bastion of support for the S&P 500 in February and March.

The 200-day hasn't allowed two consecutive closes below it in more than two years. That's real toughness.

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The bears, on the other hand, sport the 50-day moving average, which has rolled over into a marked decline for the first time since September 2016. The last time the 50-day endured a decline like we're seeing now was more than two years ago.

It wasn't a pretty sight (if you're long), as the SPX dropped 13% in three weeks.

The SPX has rallied this week on solid earnings news to poke above the 50-day, but we're not yet in the clear.

The battle is still raging, and earnings reports are just starting to roll in. But that's only part of the story.


I'm also seeing the 2,660 mark on the SPX as a convergence point between a longer-term bullish trend channel (dating back to August 2016) and a short-term bearish channel that started at the market top in late January. Last week, I broke down the details of this important technical development using charts that you can see here.

The SPX is trading about 1.5% above that key level, so the bulls appear to be ahead... for now. But as I said above, it's early.

The Bull vs. Bear Battle Might Not Last Much Longer

With earnings season just getting into full swing, the results of the first quarter could very well push the market beyond resistance and on a path to new record highs.

For now, the bulls have the advantage.

On the other hand, expectations are running high. In fact, thanks to the corporate tax cut, profit growth estimates are running between 16% and 18%, the highest such level in seven years.

Those expectations might be too high. If bottom lines fail to keep pace with ballooning estimates, support could give way, setting 2018 up to be a rough year for the bulls.

Either way, earnings will likely be the catalyst. There's another reason to pay close attention to this earnings season.

Here's Where the Biggest Long and Short Profits Will Be Made

As I've said, this has become a classic "stock-picker's market."

No longer can you just buy any stock and assume it will go higher, as many did for the past two years. The days of a "rising tide lifting all boats" strategy are gone... for now.

With the major averages hovering near breakeven for the year, this is now a market that rewards the astute stock analyst.

I analyze stocks by looking at sectors - what's hot and what's not. And earnings season is the best time to get a good read on where the money is rotating into and out of. Those sectors whose components exceed Wall Street expectations will see inflows... while those that disappoint will be punished.

We're already seeing this rotation in play, with a shift toward energy stocks and away from financials.

Speaking of energy, it will be one of the sectors headlining the schedule next week, the busiest of the season.

In fact, a mouth-watering 183 S&P 500 companies are due to report. Along with energy, homebuilders and transports are sectors with at least half their component companies on the earnings docket. Let's take a quick look at those sectors.

The SPDR S&P Homebuilders ETF (NYSE Arca: XHB) is comprised of companies that build homes, sell home supplies, and furnish homes. The major names include builders Lennar Corp. (NYSE: LEN) and Toll Brothers Inc. (NYSE: TOL), suppliers Home Depot Inc. (NYSE: HD) and Lowe's Cos. Inc. (NYSE: LOW), as well as furnisher Williams-Sonoma Inc. (NYSE: WSM). The sector hasn't recovered from the February plunge as well as the broader market, as it's down around 8% for the year and struggling under its 50-day and 200-day moving averages.


News this week of falling confidence among homebuilders and weakness in single-family housing starts won't help boost the sector. Like I said, the pressure is on earnings to deliver.

The outlook is much better for the energy sector, as represented by the Energy Select Sector SPDR ETF (NYSE Arca: XLE). With crude prices hitting a three-year high, XLE has broken above a two-month trading range, popping 11% in just two weeks.

The move has XLE's 50-day moving average looking to reverse into an uptrend, a bullish technical sign that bodes well for the next few months.


Next week, the oil services names in XLE - Schlumberger Ltd. (NYSE: SLB) and Halliburton Co. (NYSE: HAL) - will report earnings. The following week will see the major oil players - Exxon Mobil Corp. (NYSE: XOM) and Chevron Corp. (NYSE: CVX) - take center stage. The numbers need to impress, as the crude rally has already been priced in and the sector may be vulnerable to a "sell the news" post-earnings hangover.

Our last sector in the spotlight is the iShares Transportation ETF (BATS: IYT), which contains primarily airline, railroad, delivery, and trucking companies. IYT is just under breakeven for the year but is riding a strong bounce off its 200-day moving average. The move has pushed IYT above its 50-day moving average, which is turning higher.


The sector got off to a solid start this week, when J.B. Hunt Transport Services Inc. (Nasdaq: JBHT) reported strong earnings that gave the stock a 6% lift on Monday.

Next week will be a big one for airlines - Alaska Air Group Inc. (NYSE: ALK), Southwest Airlines Inc. (NYSE: LUV), American Airlines Group Inc. (Nasdaq: AAL), and Jetblue Airways Corp. (Nasdaq: JBLU) - and railroads - Union Pacific Corp. (NYSE: UNP) and Norfolk Southern Corp. (NYSE: NSC).

The next bit technical hurdle for IYT is the 195 level, which marked peaks in February and March. If reports follow JBHT's lead, the sector's momentum should continue.

So welcome to the "stock-picker's market." I love picking stocks.

This season, I'm looking at playing stocks after earnings reports rather than before. I don't like playing guessing games. Let the news break and the reactions happen. Then, I'll swoop in and either ride the momentum or fade an overreaction. Either way, I'm expecting an active, extremely profitable season.

To get you started, I'm putting the finishing touches on what I think will be a quick, double-digit gain - with the opportunity to make much, much more. Look for that to hit your inboxes this afternoon!

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About the Author

Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.

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