NEW YORK (TheStreet) -- Investors initially reacted positively to the earnings report LinkedIn (LNKD) released after the closing bell Thursday, when the stock spiked to as high as $261.56. Then, during the company's conference call, the stock plunged 20.9% to an after-hours low of $207.01. This was the opposite of the pattern displayed by Chipotle Mexican Grill (CMG) - Get Report when it reported last week: The fast-casual restaurant chain slumped on the report, then spiked later. But in both cases, this volatility could have been traded. Here's how!
Today's daily chart for LinkedIn will not show this volatility, but investors did have key levels to use to capture potential volatility before the company reported its quarterly results. Let's look at Chipotle first, then focus on LinkedIn.
When Chipotle reported quarterly results after the closing bell on July 21, the knee-jerk reaction was a share price crash of 9.8% from that day's close of $673.07 to a low of $607.01.
As a result of an after-hours reversal, shares of Chipotle gapped higher at the open on July 22, and the stock continued to set a series of all-time intraday highs, the latest of $746.40 on Friday. Like LinkedIn the after-hours volatility was not shown on the stock's daily and weekly charts.
Let's review the daily chart and levels for Chipotle then focus on the daily and weekly chart and levels for LinkedIn.
Here's the daily chart for Chipotle.
Courtesy of MetaStock Xenith
The daily chart for Chipotle shows a horizontal line in blue that represents the initial negative reaction low of $607.01 set in after-hours trading on July 21. You cannot see this spike lower on the chart due to the dramatic share price reversal to the upside. This line also connects the high of $607.36 set on July 14, 2014 through the low of $607.55 set in Oct. 21. This is how "filling a price gap" can be used to find a level at which to buy on weakness following a negative reaction to earnings.
To review, from a close of $673.07 on July 21 to the post-earnings low of $607.01 the stock declined 9.8%. The open on July 22 was a price gap higher of $695.00. The stock subsequently rallied to the all-time high of $746.40 set on Friday.
Investors looking to buy Chipotle should place a good-till-canceled limit order to buy the stock if it drops to $669.43, which will be a key level on technical charts until the end of 2015.
Investors looking to reduce holdings should place a good-till-canceled limit order to sell the stock if it rises to $820.93, which will be a key level on technical charts until the end of September.
Here's the daily chart for LinkedIn.
Courtesy of MetaStock Xenith
The daily chart for LinkedIn shows a series of four horizontal lines in blue. The highest line is the after-hours high of $261.56, which cannot be shown on the chart. The second and third lines of $250.13 and $245.30 are price-gap highs set on April 30 and April 6, respectively, which were filled, but are not shown as being filled on the chart.
The $241.84 level is the key level on technical charts where selling following the technicals shown on July 27. Investors who placed good-till-canceled limit orders to sell the stock if it rose to that level would have likely sold at the initial spike above $241.84.
The stock closed at $227.15 on Thursday, below the 200-day simple moving average of $229.16, which was a technical warning for weakness to the 50-day simple moving average of $213.60. Friday's gap lower open was below this level, and the intraday low on Friday was $200.73. From high to low, the total downside volatility was 23.3%.
Another pre-auction technical warning was the "death cross" that occurred on June 5 when the 50-day fell below the 200-day. The daily chart thus favored a sell strength trading strategy.
Here's the weekly chart for LinkedIn.
Courtesy of MetaStock Xenith
The weekly chart for LinkedIn would remain positive if the stock recovers and has a close on Friday, July 31 above its key weekly moving average of $215.36. The stocks weekly momentum reading is projected to rise to 42.26 from 36.04 on July 24. If not the downside risk is to the 200-week simple moving average of $169.38 as the longer-term reversion to the mean.
Investors looking to buy LinkedIn should place a good-till-canceled limit order to buy the stock if it drops to $189.80, which will be a key level on technical charts until the end of 2015.
Investors looking to reduce holdings should place a good-till-canceled limit order to sell the stock if it rises to $228.40, which will be a key level on technical charts until the end of August. The key level of $241.84 will stay in play until the end of 2015.
Investors not familiar with technical analysis should begin with the notion that a price chart for a stock shows a road map of past performance, which provides guidance for predicting future share price direction.
Here's how to read a daily chart. There are two moving averages to follow; the 50-day simple moving average is in blue while the 200-day simple moving average is in green.
Here's how to read a weekly chart. The red line tracks the ups and downs of the key weekly moving average. The green line is the 200-week simple moving average. The red line that oscillates along the bottom of the chart is the momentum reading on a scale of 00.00 to 100.00. A reading below 20.00 is oversold and a reading above 80.00 is overbought.
A technically positive weekly chart occurs when a stock ends a week above its key weekly moving average with the momentum reading rising above 20.00.
A technically negative weekly chart occurs when a stock ends a week below its key weekly moving average with the momentum reading declining below 80.00.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.