Trading Blueprint for Splunk (SPLK ) Stock

Enterprise application software maker Splunk (NASDAQ: SPLK) shares got caught in a downdraft with the S&P 500 (NYSEARCA: SPY) on the spread of coronavirus contagion fears. In its Q3 Fiscal 2020 earnings,  SPLK reported 40-percent software, 30-percent total revenue and 78-percent cloud growth YoY. Six quarters of double-digit growth in subscription and total annual recurring revenue (ARR) triggered a Morgan Stanley price target upgrade to $185 on Jan. 13, 2020, citing the 25-percent growth in the recurring revenue model. Mizuho increased price targets on Splunk from $160 to $175 on Feb. 13, 2020. Everything Platform received a Gartner 2020 Magic Quadrant Award for Security Information and Event Management for the seventh year. SPLK shares rode the positive narrative to all-time highs at 176.31 on Feb. 19, 2020, before the high-velocity collapse losing nearly 20-percent of its value in just seven trading days. The question is whether SPLK can fight the systemic market sell-off and present a positive narrative that can regain positive sentiment for a 2^nd half recovery.

Earnings Catalyst

SPLK reports Q4 Fiscal Year 2020 earnings post-market on Weds. March 4, 2020, followed by the 4:30pm EST conference call. Consensus analyst estimates are for 0.97-EPS profit on revenues of $784 million. Investors are braced for downside adjustments to forward guidance from the ripple effects of the coronavirus pandemic, which is quickly becoming a common daily occurrence with companies across the technology sector. Visibility is key as to whether large orders are being pushed back as opposed to canceling. Theoretically, a subscription revenue model tends to be more resilient to temporary disruptions and SPLK migration to this model is timely. The severity of the disruption will be put to the test with this earnings release. The macro-environment has set the bar low, but lack of communication from the company can still shock share prices if guidance gets cut too dramatically.

Rifle Chart Technical Analysis Trajectories: Longer-Term

We use the rifle charts on wider time frames to lay out the playing field suitable for swing traders and investors. The monthly stochastic is stalled above the 80-band as the 5-period MA gets tested at 149.45. Bulls need to SPLK to regain the monthly 5-pd MA or risk a channel tightening sell-off to the 15-period MA at the 134 Fibonacci (fib) level. The weekly stochastic has formed a bearish mini inverse pup as the 5-period MA continues to slope down threatening a downtrend on the crossover if SPLK remains under the 154.42. The daily chart formed a market structure high (MSH) sell trigger below the 168.12 followed by a full stochastic oscillation fall through the 20 band. From here the daily stochastic either crosses back up through the 20-band if it can hold above the daily 5-period MA at 149.68 or gets flushed back down for a slip to the 138.41 fib overlapped with daily lower Bollinger Bands (BBs).

Sympathy Stocks:

SPLK has positive correlation with enterprise software CRM platform providers including Salesforce.com (NYSE: CRM) , Workday (NASDAQ: WDAY) and Oracle (NASDAQ: ORCL) . These stocks tend to move in closest sympathy with SPLK in that order. The stronger the gap up or down and follow through becomes, the more compelling it becomes to consider playing a laggard sympathy, assuming positive correlation is present.

Trading Game Plan for Earnings Gap:

This information is accommodative to intraday and short-term traders looking to play the earnings gap.   With a post-market earnings release on Weds, March 4, 20202, immediately followed by the conference call at 4:30 pm EST. Only the nimblest traders should even consider hitting the immediate reaction on the post-market release. If SPLK gaps down over 10-percent on the initial reaction, a reversion bounce could set-up heading into the 4:30 am EST conference call. Nimble post-market traders can scalp the price gap reversion levels, but most should wait for the morning session off the opening bell. Traders can expect scalps ranging from 0.50 to 2.00 in the first 20-minutes as ranges and spreads eventually contract. SPLK is has become a thinner trading stock as share price increased through $100. Spreads can run wide during normal hours trading very similar to CRM and WDAY. Reversion scalps off the key price inflections levels can be played for the second gap reaction then shift focus to the third reaction trend move.

The gap price reversion levels for the upside price gaps are: 156.21 fib, 160.00, 162.76 fib and 168.12 fib/daily MSH trigger.

Downside gap reversion price levels are: 142.50 sticky 2.50s zone, 138.41 fib, 134.00 fib/monthly 15-pd MA and 129.60 overlapping fibs/sticky 5s zone.

Traders can also play the additional fibs in between the reversion price levels and the accompanying sticky 2.50 and 5s price zones as well. If SPLK forms a greater than 10-percent gap up or down, then consider trading sympathy action on CRM, WDAY and ORCL after confirming positive correlation.