Bull Signal Sounds for Johnson & Johnson Stock Before Earnings

Lillian Currens

Johnson & Johnson (NYSE:JNJ) and the state of Oklahoma are set to wrap up a trial today in a case that accused the pharmaceutical firm of being a "kingpin" in the opioid epidemic by downplaying the addictive risks of painkillers. The company's legal troubles are far from over, however, with Bloomberg reporting last week the U.S. Justice Department is investigating the company's knowledge of carcinogens in its baby powder -- news that sent the Dow stock plummeting.

JNJ is inching higher today, up 0.6% at $135.13, but has barely put a dent in the damage caused by last Friday's 4.1% plummet. Looking more broadly, JNJ has experienced a choppy year on the charts, with a late-June attempt to close last December's dramatic bear gap capped at the $145 region. On the other hand, the equity has managed a 4.6% year-to-date gain, and is up 7.2% year-over-year.

This recent drop may have created a short-term buying opportunity, if history is any indicator. During its pullback, JNJ retreated to its 320-day moving average. According to data from Schaeffer's Senior Quantitative Analyst Rocky White, in the five other times the equity pulled back to this trendline in the last couple years, it was higher 21 days later 60% of the time, and averaged a one-month return of 3.84%. A similar move would put JNJ right near Thursday's pre-bear gap levels at $140.

JNJ Chart July 15
JNJ Chart July 15

Johnson & Johnson's earnings report, which is slated for release tomorrow morning, could determine the stock's direction, too. JNJ has clocked a positive earnings reaction following five of the last eight reports, including a 3.5% swing higher this time last year. This time around, the options market is pricing in a 3.3% swing for tomorrow's session, slightly higher than the 2.3% post-earnings move it's averaged in the past two years.

Expanding on activity in the options pits, it looks like traders are ramping up their bullish bets before tomorrow's unveiling. Currently, over 25,000 calls have crossed the threshold so far today, three times what is typically seen at this point. The October 140 call is seeing most of this action, followed by the July 136 call, with positions being opened at both.

Split analyst sentiment could sway JNJ stock, too, with seven "buy" or better ratings compared to five "hold" ratings on the table. The consensus 12-month target price of $149.17, however, sits in territory the equity has yet to reach.