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Earnings season is always cause for joy in the investment world. Stocks tend to move after they report their numbers, and that's a juicy opportunity for traders.
Just look at what happened with Twitter Inc. (NASDAQ: TWTR) Tuesday. It crushed expectations for user growth, jumped 7.4% higher at the open, and kept going, finally closing up 15.6%!
But there are plenty more opportunities for savvy traders in the coming week.
Of course, the trick is knowing whether the company will report good news or bad, which will determine which way share prices will move. And Wall Street's response is even harder to predict. Even if the company beats earnings expectations, it may report weak forward guidance. Wall Street might ignore the earnings beat and crush the stock for its lowered goals.
You Can Make $30,000 in Just 10 Weeks: This proprietary screener has identified what could be the No. 1 sector to play this earnings season. Once you know it, you could get set up to turn a small stake into $30,000 in the next 10 weeks. See it here.
Just look at motorcycle legend Harley-Davidson Inc. (NYSE: HOG). Tuesday, before the open, the company announced better-than-expected earnings but a miss on revenue. The stock even benefitted from a pre-market presidential tweet so it looked as if traders liked what was happening.
But then they had a collective change of heart, sending a 2.7% pre-market gain into a 2% loss by the end of the regular trading session.
Fortunately, there's a strategy traders can use to get an edge on the market and turn earnings season into a golden opportunity…
No Need to Guess to Make Profitable Earnings Season Trades
How could you have known which way Harley was going to go?
Well, unless you are privy to the earnings report before it is released – something they call "insider information" and is illegal to trade on – then you really cannot know.
But the market isn't entirely random, and it does leave signs for us to read. That is, if you know what to look for. That's why it's important to have someone in your corner who knows the market's language.
That language is revealed in a stock's technical trading pattern. Are traders piling on to one side of the market – short or long – ahead of earnings? Or is the stock moving one way, only to head the other when the news finally comes out?
Money Morning Quantitative Specialist Chris Johnson has made a career deciphering the message and setting up trades to take advantage of it.
For example, he looked at UnitedHealth Group Inc. (NYSE: UNH) last week and noted that the trend was to the downside. The thing about trends is that they tell you which way stocks are likely to react to the goings on around them and in the boardroom. UNH announced that it beat earnings estimates and raised its forecast but still got crushed in trading.
Bad price action on good news is bearish. So was the trend.
Chris looks at many technical and quantitative factors. Did a stock drop below a price at which investors thought it was cheap in the past? If so, the market is telling us the company is weak.
What about the overall market condition? Last week, he pointed out that the fear index – aka the CBOE Volatility Index (VIX) – moved to very low levels, a sign traders were no longer worrying about a big drop. Sure enough, stocks shrugged off worries that the rally from December was tiring, and on Tuesday, the S&P 500 closed at a record high.
By assessing the overall market tone and then drilling down to individual stocks, it is possible to find opportunities to buy or sell a stock right after the earnings release and ahead of others who have to think about what the earnings mean. Are they really good, or is this just a knee-jerk reaction that I should sell?
Having a blueprint ahead of earnings announcements can put you in position to really capitalize on these moves.
And Chris is sharing his earning season screening tool with his subscribers right now.
Make this your most profitable earnings season yet…
The Secret to Potentially Cashing In BIG on Earnings Season
Not every stock shoots up after its earnings announcement. In fact, some go down – and fast.
The key is knowing exactly which stocks can skyrocket in price – and when.
With this market genius's proprietary screening tool, you can pinpoint exactly which stocks are the strongest – and the most likely to produce big returns.