A Stock You Can Sink Your Teeth Into

Recently, Eli Lilly (ELY) was a stock that I discussed in a Daily Market Report (DMR) to members.

It's a leading stock in a leading industry group - pharmaceuticals ($DJUSPR) - and it had just reported earnings. LLY beat on its top line (revenues) and bottom line (earnings), but had already advanced into its quarterly earnings report. It was a classic "buy on rumor, sell on news" as LLY fell 20 bucks to test its rising 20-day EMA. Many times, that's a solid entry point into a leading stock. That leads me this morning to Diamondback Energy (FANG), which reports quarterly results after the bell today. Check out FANG's chart:

Enter Diamondback Energy, Inc. (FANG):

Here we have another leading stock in a leading industry group - exploration and production ($DJUSOS) - but it's been moving straight up for the past 5-6 weeks. While I expect to see a solid earnings report, complete with better-than-expected revenues and earnings, I also know that FANG has climbed about 45% during this rally and is due for a pullback. The PPO (circled in red) appears to be topping as FANG could use some near-term selling to wash out some of the current risk of entering a trade. This is a perfect setup for a near-term selloff, even if FANG were to gap up with its earnings results.

Let me be clear, I would NOT short it. First, my trading strategy changed in June when I called a market bottom. I believe this is a dangerous market to short. Second, I especially don't like shorting a leading stock in a leading industry group. Instead, my strategy would be to realize the strength of FANG and wait to see I can buy on short-term selling, assuming that it does, in fact, beat Wall Street consensus estimates this afternoon.

Happy Trading! Tom Bowley Chief Market Strategist EarningsBeats.com Better Timing. Better Trades.