August 5, 2010
Mish's Daily Articles
By Mish Schneider
There isn't necessarily a strong relationship between a company's profits - or losses - and that same company's stock performance. The exciting part of earnings season for me is that when it corresponds with certain technical setups, you can bank on volatility right before and directly after the stock report-a trader's dream!
With that said, unless you are a student of seasonal patterns, never keep a position into the report. No regrets if the stock roars and lots of high fives when the stock collapses.
Let's examine 2 trades -both executed with minimal risk- GOOG in April 2010 before its report and BIDU in July 2010 after the report.
Trading the Technical Setup for a Move Prior to Earnings:
I like to look at a chart setup about one week before I know the earrings schedule for a stock. GOOG hit the radar big time since it was perfectly lined up as far as the relationship of the 4 key moving averages and their slope. GOOG had made a run and then spent several days hovering around the 10 day movong average. I waited for the least amount of risk possible coupled with a strong short term trading pattern setup. Voila! On April 9th, 2010 GOOG had an inside day and tested but closed above the 10 day moving average. Sweetening the pot was that it also had a narrow range day. It paused 4 days before its earnings report. The range on April 9th was a high of 568.77 and a low of 564. The next day, GOOG opens at 567.35 - still within the range of the day prior. Depending upon your trading timeframe, there were a couple of choices. First to buy over the prior day's high and risk to under the current day's low of 566.22 (A fill at 569 would give you a $3.00 risk on a $9 average true range stock - 1/3 ATR - good day trading parameters. Second, buy over prior day's high and risk to under prior day's low. A $5.00 risk, more in line for a miniswing trade. Since we were in for the possible run before earnings, we did the latter. But, we adjusted our position size to fit our money management parameters.
GOOG continued to run up right until the closing bell on the day it reported. We took some profit on April 11 as GOOG rallied nearly $20. But, we kept a small position with zero risk. GOOG was set to report after the close on April 15th. We exited at 595.00 and made $26.00. After the report, GOOG dropped precipitously. The next day GOOG came in at 563, $33 lower than the prior close. And, the stock continued to move lower until early July when it bottomed out at 433.63.
Trading the Technical Setup for a Move After Earnings:
After the close on July 21, 2010 BIDU reported earnings. The next morning, BIDU opened a bit higher than the prior day's close, but could not take out the high of the prior day, even though in the post market after earnings, it had rallied up over $80 before retreating by morning. Technically, we decide to wait for the 2 prior day's highs of 76.58 and 76.46 respectively, to be taken out. On July 23rd, we enter a long position over 76.58 with a buy stop and risk to under the 10 day moving average or 73.99. BIDU has a $2.53 Average True Range, so our plan is to trade this as a swing trade. BIDU closed at 78.06 that day, without a moment of pain. At the time of writing this, August 5th, BIDU closed at 86.54, $8 above our entry and with over 3 ATRs in profit. We like to take 1/4 to 1/3 of our position off at 3 ATRS and then use a trailing stop for the balance until it reaches our next threshold of profit.
Simply buying or selling before or after earnings without a strategic plan that includes a clear risk related to a specific timeframe with a reasonable target makes for aimless trading. We specialize in tools that scan for stocks that: