Playing earnings warnings

  • September 28, 2006
  • Jea Yu

When a
company warns or misses earnings guidance, it usually results in a gap down on
selling.  The question always arises as to whether one should buy for
a bounce or short for a further decline.  We have a solid system to play these
dumpers.  It involves the 1 minute and 3 minute charts with 5/15 period simple
moving averages and stochastics.  Despite human nature to jump in right at the
opening bell, the safest play is to wait out the first 10-15minutes until the 3
min 5 period moving average ‘catches’ down closer to the stock’s price.  Once
the moving average gets near the stock price, one of two things will happen. 
Either the stock will bounce through the 3 minute 5 period ma and base with 2 or
more candles and work a bounce to the 15 period moving average, or it will test
the 3 minute 5 period ma and flatly REJECT off that level.  When the rejection
forms, the 3 minute stochatics will triggers a mini inverse pup and the 1 minute
stochastics will SLIP.  Mini pups are when the lead %d stochastics stalls on the
rise as the laggard %dslow stochastics continues to rise to form a wedge like
breakout and vice verse on breakdowns. This 1 min slip is the trigger to go
short. 

 

This was the
case when we played
(
RHAT |
Quote |
Chart |
News |
PowerRating)  9/27/06.   RHAT gapped down on weak earnings.
 We waited for the 3 minute 5 period ma to catch down on RHAT which was sitting
near the 20.72 level.  We stepped in SHORT at 20.60 with a trail stop at 20.77
at 9:40am as the 1 minute stochastics slipped and formed a 3 minute mini inverse
pup lean.  RHAT panicked hard to sell off through 20 where we locked the shorts,
out + .60

 

 

As we get closer to earnings
season, this setup is a very nice profit maker on any companies that gap down.

 

Good trading gang!

 

Jea
Yu has been involved with the equities markets for over 10-years. He specializes
with intraday trading in the U.S. equities and futures markets. To receive a
free 7 day trial to Jea Yu’s Underground Trading Pit,

click here or call 888.484.8220, ext. 1.Â