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A Tale of Two Heavyweights

I am looking at plays on Google and IBM, which are set to report next week.
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Two financial giants reported this morning and we'll hear from a few more next week. Right now I'm looking at two tech heavyweights who will report next week: Google (GOOG) and IBM (IBM). This is a tale of two heavyweights: GOOG is up almost 23% year-to-date while IBM is in the red 2%.

I have seen lots of folks recommending IBM lately, citing the value and the upside, etc. . The more I hear the arguments, the more they sound like they are coming from folks who are caught in a value trap. This quarter IBM must turn it around. I think they need to get away from focusing on what earnings are going to be like years down the line and provide some answers how the picture will get better in the short term.

GOOG, on the other hand, needs to show the government shutdown has had no impact on numbers. On both, I'll dig into the fundamentals over the weekend, but I find it easier to get a look at the technical picture. Right now, GOOG is pricing in about a $38.60 move into earnings or about 4.4%. Looking at the chart, I feel like GOOG is set up for a much larger move something more in the neighborhood of $50-$60. The stock has a large channel between $850 and $930 pushing on a downtrend line at $870. I don't see the $845-$850 area as strong enough to hold on bad news. It could hold on a sell-the-good-news reaction, but on negative news, I expect to see $820 tested. On the upside, I do think $900 will attract people since it is a round number, but $930 is looking more likely as a target for me.

Google (GOOG) -- Daily

Source: StockCharts.com

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My early thoughts are to use a diagonal call spread for an upside play and some put combination where I will be long $845 puts and short $820 puts. So I will set up either a ratio put spread or some unbalanced butterfly. It makes sense to wait until closer to the date to open any position, but just thinking through possible plays is a good exercise.

IBM's chart is also in a channel, but this it is a bearish channel. The stock is pricing in a move of $7.60. Right now I have the upside around $191 and the downside around $178, both the confines of the channel. This has me looking for a smaller than expected move. IBM has been beaten down, so I'd say the bigger push could come to the upside since it feels like a lot of upside expectations have been removed.

IBM (IBM) -- Daily

Source: StockCharts.com

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The longer term issue is below $178. If IBM stumbles, then $162 is possible based on a loose head-and-shoulders pattern. There really isn't anything in the MACD or CCI that makes me lean one way or another, so a directional play will be very unlikely for me. IBM may make an after-the-earnings play rather than one into the number.

At the time of publication, Collins had no positions in the stocks mentioned.