July 23, 2007 at 10:37 am | | Comments 1

Save Money & Confusion by Avoiding Earnings Trades

If you’re an active trader, it’s likely that you take a similar approach to me when it comes to earnings reports. Because I have no problem moving to cash quickly, I refuse to hold stocks into earnings announcements. Not only do I have no idea what the reports are going to be, I also don’t know how the market will respond once the report is out. I don’t have a crystal ball, plus the playing field isn’t level when it comes to information, which is why I’m a technical trader.

A key reason why I avoid earnings is that once an earnings report is released, the stock will almost always produce a breakaway gap after the news is out. That can shift the risk/reward profile significantly for a trade, so I tend to just let the stocks settle down later and revisit them at that point to see if a good chart pattern is developing. If it does, I will take it for a trade and manage it accordingly.

We’re right in the thick of earnings season, and it’s important to pay close attention to the calendar and know when your stock is due to report, whether it’s just a stock on your watch list or one you already hold a position in. This can save you money and confusion!

Over the weekend, a great example occurred of how watching the earnings calendar before a trade helped prevent confusion for me. I have had CALM on my radar for a few days for a potential buy, but before I actually set up my order for the stock I checked the earnings calendar first. I soon realized the report was coming out this morning in the pre-market, so I didn’t set up the trade. Here’s a look at how CALM looked prior to today:

(Click for full-size image, courtesy of TeleChart)

CALM gapped higher this morning but instantly came under pressure, falling 6.8% from its best level of the day in less than 40 minutes. Had I bought the stock, I’d have found my trade quickly underwater, which would have added some confusion on just what to do…(Wait for a rebound? Take the loss?). Here’s a look at CALM after the gap up and the way it left the daily chart looking:

(Click for full-size image, courtesy of TeleChart)

Just remember, earnings are tricky all around. Whether it’s a stock you already own or are merely considering an entry in, watch the earnings dates closely and be willing to avoid the stock around that time. There is a sea of stocks to choose from, so let the news-related excitement dwindle so that you can make a better-informed trading decision.

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service

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  1. From Earnings Are Tricky | on Oct 18, 2007

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