Your Guide to Trading Earnings
As you know, everybody’s eyes are on earnings this week.
Well, predicting the reaction to an earnings announcement is notoriously difficult.
There are more reasons than I can think of that make this statement true.
Even if a company misses on revenue and income, the stock price could rise sharply higher if the market’s expectations were low because they pre-sold their report.
We saw this a ton last quarter, and we are seeing it again right now.
Future guidance was better than expected, leading investors to believe the company is a good place to park some cash for a few months.
Even something as simple as “the conference call contained some bullish language” can cause investors to feel like the risk is low.
Not only that, the sharp reactions to earnings can also blow up technical charts as prices move beyond strong support and resistance levels.
There are really only two occasions that I’ve traded stocks ahead of earnings – more on that in a bit.
First, let’s take a look at how technical analysis is best used to capitalize on earnings announcements…
Pre-Earnings Trading Strategies
Some traders place directional or volatility-related bets prior to earnings announcements.
While these strategies can be risky, the payoff can be much higher than post-earnings trades since there’s greater volatility following the earnings announcement than afterward.
I’m okay with the noise in these times on one condition…
In the rare situations when I can allow the larger trend to play out, it may be OK to trade a stock heading into earnings.
The two most common pre-earnings strategies are
- Directional Bets:
Predictive models incorporate analyst estimates, earnings history, and price movements since the prior earnings to quantitatively predict the market reaction.
This is the reason for the watch list you received Sunday. The analysts are on the same side of the boat, and it is leaning hard to one side.
All it takes is a single wave to send those stocks down the tubes. In this case, as we head into earnings, that may just be the straw that breaks the camel’s back.
While not every reaction is predictable, better-than-average prediction rates can be a profitable trading strategy over time.
- Volatility Bets:
Technical analysis can be used to determine the likely support and resistance levels on the upside and downside for a given company.
This is where those famous blue lines come into play – the Bollinger Bands!
They work great as a simple and easy-to-use indicator to find the resistance and support levels.
If you’re feeling a bit more interested, you can also dig deeper into the data and look at the open option interest.
You can find the levels there by looking at the peak open interest. That’s where the money is going, and the market will have some trouble breaking those points of interest in the market.
Using these levels and indicators, traders can place volatility-related bets using options rather than trying to predict direction.
With that said, there have been two occasions I’ve traded stocks ahead of earnings. First, NVDA last quarter, and then, NKE last week ahead of their report.
In both cases, I follow my rules on trading back-month options on the stocks to allow the trends to play out over time instead of the “noise” of the earnings headlines driving my trade.
On both occasions, although I took a risk, it ended up paying off…
Post-Earnings Trading Strategies
Many traders avoid placing trades prior to an earnings announcement due to the directional uncertainty but still try to capitalize on the volatility after the fact as the market struggles to reach an equilibrium.
These strategies have less risk, but also less upside potential.
The two most common post-earnings strategies are:
- Fading Strategy:
Many day traders watch stock prices following an earnings announcement and try to predict an inevitable fade in the price following the strong initial move.
Take-profit and stop-loss points are often placed using support and resistance levels established earlier in the day or week.
Kenny and the VWAP are your gold standard for trading with this strategy.
Of course, I will be trading at this point as well, but it won’t be on the short-term plays. I will still be looking for space and time for the larger trends to play out.
The biggest benefit to our trading style post earnings is centered on the knee-jerk reaction that will allow us to get in at the extremes of the price. This can decrease our premiums as we get into the trade and allow for a better position to buy in at.
- Swing Trades:
Swing traders often look for earnings announcements that serve as a turning point.
By applying technical analysis following the announcement, these traders identify where the price is likely headed over the coming few sessions.
This is a bit more in line with what we’re doing.
Of course, we typically hold positions for about three weeks, but you won’t catch me looking a gift horse in the mouth. I will gladly get out of a position for a small gain and keep looking for the next opportunity.
What to Remember This Earnings Season
Trading earnings announcements can be challenging due to the high level of uncertainty and volatility, but there are several trading strategies used for pre- and post-earnings trades.
These strategies can help traders cut through the noise and find profitable opportunities.
That is why I’m here.
I aim to teach you everything you need to know about technical analysis and explain what to use, when, and why we trade this way.
With the number of indicators we use, you can easily find the levels of support and resistance in the market, know where your targets are, and uncover your next trading opportunity.
I’ve been doing this long enough to know that it can be easier at certain times than it is at others. If you find you’re having difficulty figuring out what to look at, just join me in Penny Nation or even Night Trader.
You’ll get more time with me and my teachings, and I will be giving you official recommendations every single week so you can grow your portfolio while learning all the nuances to technical trading.
That way, you won’t be victim to headlines and noise at times like this.
You can set your traps and rest easy.
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October 04 2022
