How to Play Hewlett-Packard's Fundamentals Vs. Technicals Tug-of-War

NEW YORK (The Street) - The technology giant Hewlett-Packard's (HPQ) diverse products and services make achieving better-than-expected earnings a juggling act. Meanwhile, chart patterns are topsy-turvy, with the stock above its 50-day simple moving average on its daily chart but below its key weekly moving average on its weekly chart.

This dual tug-of-war between fundamental opinions and mixed technical patterns will be won with a positive or negative reaction to earnings. Hewlett-Packard reports quarterly earnings after the closing bell Thursday, and analysts expect the company to earn 86 cents a share.

Jim Cramer believes that the details of splitting the company into two companies could trump earnings. Jim's not recommending the stock, but could make a call following post-earnings weakness. H-P's outlook on their enterprise services business could be a key. 

Others worry about a potential earnings drag from the strong dollar, but look for improvement in the PC business and cite positives from ongoing cost-cutting. Hewlett-Packard announced Thursday it is selling its 51% stake in a China data-networking operation for about $2.3 billion.

Let's see how the earnings volatility can play out looking at the daily and weekly charts.

Investors not familiar with technical analysis should begin with the notion that a price chart for a stock shows a road map of past price 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. This chart shows weekly price bars going back to the beginning of 2007 and thus includes the Crash of 2008, then the current bull market for stocks that began in March 2009. 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.

Here's the daily chart for H-P.


Courtesy of MetaStock Xenith

Hewlett-Packard had a close of $33.07 down 18% year to date after setting a multiyear intraday high of $41.10 on Jan. 9. This high marked the end of a momentum run-up from the 200-day simple moving average when it was $21.65 back on Oct. 9, 2013. H-P was a victim of the tech bubble with an all-time high of $76.68 set in April 2000.

The stock had a price-gap to the downside on Feb. 25 when a negative reaction to earnings plunged shares below its 200-day simple moving average then at $36.24. This negative reaction pushed the stock to its 2015 low of $31.00 on April 6.

Since then shares of H-P have clawed its way above its 50-day simple moving average of $32.75. If the stock is above its 50-day following earnings the upside potential is to the 200-day now $35.91.

Here's the weekly chart for H-P.


Courtesy of MetaStock Xenith

The weekly chart for Hewlett-Packard will shift to positive if the stock closes this week on Friday above its key weekly moving average of $33.40. The momentum reading for the stock is already rising above the oversold threshold of 20.00 with a projected reading of 30.40 up from 26.51 last week.

Normally the dynamics of the weekly chart will out-weight those of the daily chart which would favor an upward trend above the key weekly moving average of $33.40 rather than a downtrend below the 50-day simple moving average of $32.75. This defines the technical tug-of-war.

Investors looking to buy Hewlett-Packard should place a good till canceled limit order to purchase the stock if it drops to $31.84, which is 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 the stock rises to $37.88 which is a key level on technical charts until the end of June. 

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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