Trading Binary Events: $PBR Case Study

$PBR (Petroleo Brasileiro Petrobras SA: NYSE) reports earnings on Wednesday and given the drama surrounding the company's delayed release, it's likely that we will witness volatility as traders position themselves for the unknown.

Earnings releases are binary events: they can be great for shareholders or they can be dreadful. Stocks can either soar higher after a solid report or collapse if a company under delivers on Wall Street's expectations.  I don't like betting on binary events, but trading stocks in anticipation of them can be exciting so long as you manage risk and trade with short time frames in mind.

So let's put aside the unknown that is Wall Street's reaction to the upcoming earnings release and take a look at the price action for $PBR to see what it may be hinting at, at least in the very near term:

$PBR : Petroleo Brasileiro Petrobras SA

Since the end of March, the bulls have dominated the price action on the daily time frame, as +DMI crossed above -DMI and has held above it since then. The momentum of the trending move higher picked up when the stock pushed above $7, as the rising ADX line on the hourly chart pointed out by the elongated blue arrow reflects.

However, since climbing to nearly $9 from its yearly lows of just under $5 a month ago, $PBR is showing some signs of exhaustion. The ADX line on the hourly chart has been in decline, indicating a trading range scenario where the bulls and bears can be expected to push the price around between support and resistance levels.

Since 4/15, the $9 area has been a clear resistance level that the bulls have failed to overcome. Below, we have support at roughly the $8.30 price level, followed by a runaway gap around $7.75 that may be filled should bears be able to exert enough selling pressure.

The 5 day moving average is currently at $8.67 and the bulls have thus far held $PBR above it on every close since 3/30. However, the fact that the bulls were unable to close the stock above its open price yesterday, in addition to a subsequent rejection of price at the roughly $9 resistance level, is a sign of weakness on their part and may foreshadow a pull back in the short term.

The hourly chart is showing that RSI has been hovering at just above the 60 level since 4/16; the bulls are not as strong as they were just a few weeks ago and any sustained break lower in RSI would be in favor of the bears. Bollinger bands on the hourly chart are also tightening, which is a sign that volatility in price action is likely to commence soon.

If the bulls are able to manage a close above $9, this would be bullish, but with an earnings release approaching, there is no way to predict how Wall Street will respond, so its best to simply trade what one sees on the charts in limited time increments.