You can trade big moves triggered by earnings, here’s how

The
market experienced a vicious selloff the last few days. 
It certainly
appears that the market was propped up last week by institutions looking to
close their quarters on a positive note. This week they all threw in the towel.
The S&P 500 and Dow 30 both broke key support levels today on big volume. On the
bright side, fear levels spiked and price has become oversold in many areas.
That doesn’t mean the selling is over, it just means we are likely to see a
bounce fairly soon. 

 

Sector
Action

 

One area that’s been hit
especially hard and has quickly become oversold is the (formerly?)  leading oil
stocks. When the market pulls back it is not unusual for leading stocks to pull
back harder than most. This is because they are typically the most extended in
price and have the most short-term holders, which are easily scared
out. Therefore the selloff in oil stocks the last few days, while fairly
extreme, is not an unusual occurrence.  I have no idea whether they have topped,
but I’m sure it won’t take long before you start seeing top-pickers saying
that.  What I do know is that even if they have topped, it will be confirmed by
a bounce that makes a lower high.  With the selling already at extreme levels,
it is now time to start scaling in to this area. My preferred way to make
contra-trades like this is by using ETFs.  In this case I prefer
(
XLE |
Quote |
Chart |
News |
PowerRating)
. Should
the price continue to fall over the next few days, I would continue to scale
in. I would then look to sell on the inevitable bounce.

 

Earnings
Reminder

 

The next few weeks will be
heavy with earnings news. I can’t stress enough how important it is for you to
be aware the earnings dates of the stocks you hold (long and short).  Don’t be
caught by surprise and mistakenly take on more risk than you are comfortable
with just before an earnings release.

 

I would suggest that you either
keep an extra column on your list of stocks with the earnings date next to it,
or have a calendar with all your stocks listed on the date of their release (my
preference). Be sure to note whether earnings are due before or after the bell. 

 

Frequently by watching the
action of a stock as it approaches it’s earnings release, you may get tipped off
if that stock is going to surprise to the upside or downside.  It’s especially
important to watch for unusual activity the day before the release. Many times
the last 15 minutes or so before the close can be telling if there is an
unusual, high volume move.

 

You should also make sure
you’re aware if a stock you are purchasing (or shorting) is about to release
earnings. Many times a stock may break out or break down in anticipation of
their earnings release.

 

In general, stocks that make
unusual moves just before earnings are released will then often surprise in the
direction of the move. (i.e. a breakout will portend an upside earnings
surprise.) Beware though, when the opposite occurs, the resulting gap down (or
up if you shorted a breakdown) will be especially vicious.

 

Best of luck with your trading,

 

Rob

 


robhanna@comcast.net