In Two Days: The Make or Break Moment For Stocks

The immediate direction of the stock market is once again in the hands of Merrill Lynch (MER).

 

One of the world's leading investment banks, MER reports earnings this coming Thursday, and investors' reaction to the numbers will tell us how to trade the stock market over the next few weeks.

 

If MER rallies on the news, then the market has a good shot at making new highs by the summer. On the other hand, if MER drops, then we'll likely see a retest of the recent lows.

 

At this point – it's a coin toss.

 

Earnings estimates are all over the place - ranging from $1.73 per share to $2.21 per share. The bulls talk about the strength in MER's bond underwriting business and the huge growth in fee-based asset management.

 

The bears argue that there's too much risk in Merrill's subprime lending business. And the relatively low volume in the stock market can't be good for MER's commission business.

 

With shares trading at just 11 times earnings, it seems as though a fair amount of bad news is already priced into the stock. So, there's the potential for an upside surprise.

 

But the chart says otherwise…

 

 

 

The chart is tracing out a bearish flag pattern – which almost always leads to more downside action – like the ones we saw last May and June.

 

The bears probably have the edge here, but it's not enough of an edge to bet on. It makes more sense to wait and see how the market reacts to Merrill's report and then trade accordingly.

 

Last April, MER reported record earnings – but the stock tanked anyway. The stock market followed MER lower shortly thereafter. The same thing happened this past January…

 

Back in July and October, however, investors reacted favorably to MER's earnings reports and the stock market rallied.

 

There's no way to know how the market is going to behave when MER reports earnings this coming Thursday. But the movement in Merrill Lynch will tell us a lot about what to expect over the next few weeks.

 

Best regards and good trading,

 

Jeff Clark

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